Is Trade Credit Insurance Right for You? – The Honest Answer
Why might trade credit insurance not be right for you? The main factor that might exclude you as a potential candidate for TCI is uniformly low exposures. With standard credit insurance excesses of $5,000 (though they can be as low as $2,500), if your clients typically trade no higher than $10,000 or $15,000 at any one time and you have had minimal instances of bad debts, the ‘cost vs. benefit’ equation almost certainly would say it’s not. This raises the question: when is it worth it? Here are some examples:
A) Most of your clients trading at under $10,000, but one client trading at $50,000? Possibly, although it would still be debatable and depend on your industry and how much you know about the larger buyer.
B) A long tail of clients under $20,000 and one client trading at $100,000? Again, possibly, depending on your industry and the cost of the premium. (See our article on “How Much Does Trade Credit Insurance Cost?”)
C) Five clients trading at $50,000 and one larger client with exposures of $150,000? In this case, with a well-structured policy and negotiated premium, TCI becomes definitely worth considering.
D) Five or more clients with exposures over $100,000 at any one time? Credit insurance should definitely be considered.
One common reason some companies hesitate to consider credit insurance is their confidence in their clients, some of whom may have been known to them for years. This perspective is understandable, especially for those who have been in business for a long time, sometimes decades, without experiencing a single loss. However, it’s important to recognize that without detailed information and insights into your clients’ financial positions, including their status with the ATO, assessing their true financial stability can be challenging. A notable example is Dick Smith, an iconic Australian brand supported by major banks and credit insurance underwriters until the week they failed. In trade credit insurance, predicting the future is notoriously unreliable.
It’s always beneficial to obtain a quote. At the very least, it will provide you with an exact idea of costs and insight into how the insurance market views your top clients.
