Credit Insurance: Is It Worth the Money for Your Business?
Credit insurance covers your loss if a customer does not pay. But when is it worth paying for? Here is how it works and what to watch out for.
What is credit insurance?
Credit insurance, also called trade credit insurance (kreditforsikring), covers your loss if a customer does not pay for goods or services you have supplied on credit. Typically it pays out when the customer goes bankrupt, or when the customer has not paid within an agreed period after the due date. It is aimed mainly at businesses that sell to other businesses.
Credit insurance does not replace good credit management, but it can protect you against the large, unexpected loss that could threaten your company's liquidity.
How it works in practice
- Credit limits: the insurer assesses your customers and sets a credit limit for each of them. You are only covered up to that limit.
- Excess and level of cover: the policy typically does not cover the whole loss. You bear part of it yourself, either as a percentage of the loss or as an excess.
- Notification: you must report late payments within the deadlines set by the policy. If you do not, you may lose cover.
- Recovery: many insurers also help recover the claim before compensation is paid.
Expert tip: Read the notification deadlines carefully
The most common reason a business is not covered is that a late payment was not reported in time, or that it delivered beyond the credit limit. Build the policy's deadlines into your reminder procedure so they are not missed.
What does it cost?
The price depends on your turnover, your industry, your customers' creditworthiness, how concentrated your customer portfolio is, and how much of the loss you are willing to bear yourself. It is often calculated as a percentage of the insured turnover. Get quotes from several insurers: both price and terms vary. Major providers include Atradius, Coface and Allianz Trade (formerly Euler Hermes).
When does it make sense?
Credit insurance is typically most relevant when:
- you have a few large customers, so one loss can hit hard
- you give long credit terms or sell large amounts on credit
- you sell to customers abroad, where assessment and recovery are harder
- your bank wants your receivables insured, for example for financing
- you do not have the resources for thorough credit assessment yourself
It is less relevant if you have many small customers, short credit terms, or if your customers are mainly consumers.
Pros and cons
Pros:
- Protection against large, unexpected losses
- Ongoing credit assessment of your customers by the insurer
- Help with recovery
- Can improve your access to financing
Cons:
- The premium is a fixed cost, even in years without losses
- You are not fully covered: the excess and level of cover mean you still bear part of the loss
- Credit limits can restrict how much you can sell to a customer
- Administration: you must comply with the policy's requirements and deadlines
Expert tip: Work out your own loss level
Look at your bad-debt losses over recent years, and at what a single loss at your largest customer would cost. Compare that with the premium. The insurance is not about making money, but about turning a potentially catastrophic loss into a known cost.
Alternatives
- Better credit management: credit checks, credit limits and systematic follow-up
- Security from the customer: prepayment, a bank guarantee or retention of title
- Non-recourse factoring: where the factoring company takes over the risk of the customer not paying
- A letter of credit for exports, where the bank guarantees payment
Getting started
Take stock of your customers and your risk of loss, and get quotes for credit insurance if you have large or concentrated risks. If things still go wrong, you can use InkassoHurtig to get no-obligation quotes from police-authorised debt collection agencies and lawyers. This content is general information and not legal advice.