Is Trade Credit Insurance Worth it for Small Businesses?

This is where trade credit insurance comes in. It is designed to protect businesses from bad debt losses. By mitigating the risk of unpaid invoices, this type of insurance provides a safety net that allows businesses to confidently offer credit terms.

What Exactly is Trade Credit Insurance?

Trade credit insurance, also known as business credit insurance, is a form of business coverage that protects a business from losses that occur when clients and customers are unable to pay. One of your key customers could go into an insolvent state, and without insurance your business might go into financial distress.

Why Should Small Businesses Care?

According to Allianz Trade, 1 in 4 businesses fail due to late or non-payments from customers. While larger corporations often have legal teams to handle delayed payments, small businesses don’t always have that luxury. One large unpaid invoice can threaten monthly salaries or rent. In South Africa, where SME failure rates are already high, cash flow is everything.

The several benefits to having trade credit insurance, including:

Cash flow stability: You get to predict income and manage your cash flow effectively, even when customers default.

Increased confidence: You can extend credit to more customers, including new ones, with less risk.

Access to finance: Business credit insurance helps you increase the chances of your business being viewed favourably for funding.

Improved customer relationships: Trade credit insurance can help you build stronger relationships as you gain more confidence in providing credit.

Competitive advantage: Offering credit terms to customers can give you a competitive edge in the marketplace.

Professional risk management: By transferring the risk of bad debts to an insurer, you’re able to be proactive in your risk management, which can be beneficial when seeking investment or partnerships.

How Does Trade Credit Insurance Work?

Business credit insurance safeguards businesses from financial losses due to unpaid invoices. When a customer fails to pay for goods or services rendered, the insurance policy covers a significant portion of the outstanding debt.

For instance, if you own a packaging company and delivered goods worth over R50 000 to a regular customer, but you don’t receive your funds this time around because the company has gone into liquidation, you can claim a portion of that amount from your insurer.

This protection helps maintain a business’s cash flow and financial stability, especially for small businesses that are more vulnerable to the negative impacts of unpaid invoices.

What Are the Disadvantages of Trade Credit Insurance?

Like any insurance, there are exclusions and fine print. The downside includes the following:

Cost of premiums: It can be expensive, especially for small businesses or those in high-risk industries.

Exclusions and limitations: Policies often exclude high-risk buyers, disputes, or pre-existing overdue invoices.

Delayed claims process: Payouts may take time due to investigation and documentation requirements, which can badly affect cash flow.

Loss of control over credit decisions: Insurers may limit your ability to trade with certain customers or impose credit limits you must follow, even if you believe the customer is trustworthy.

Risk of dependency: Businesses may become overly reliant on insurance and neglect their internal credit control processes.

Not always fully covered: Insurers might only cover a portion of the loss (e.g., 90%), leaving you with a share of the bad debt.

How Do You Get Trade Credit Insurance in South Africa?

To get insured, you must first consider whether there is a need for it, and do your due diligence in comparing between the various insurance providers. Follow these steps:

Assess your risk: Are you offering large amounts of credit to a few key clients? Are you worried about late payments?

Speak to a broker: Insurance brokers specialising in commercial policies can help you find a trade credit solution tailored to your business size and needs.

Compare providers: Leading companies like Credit Guarantee Insurance Corporation (CGIC), Sanlam, and Hollard offer trade credit insurance. Compare pricing, pay out terms, and what’s covered.

Understand the terms: Before you sign, make sure you understand exclusions, claim processes, and how long it takes to get paid out. Speak to a professional, other than the sales consultant who might focus on pushing you to get the insurance.

Read here for more on other types of insurance for your business.