The Importance of Trade Credit Insurance

The UAE is a hub for international trade. With many organisations establishing their regional offices in the country, there is a great opportunity for trade. Credit Insurance enables businesses to maximise their opportunities by allowing them to provide credit to clients without the risk of financial loss due to the client’s inability to pay due to insolvency.

As entrepreneurs, it’s justifiable that business owners strive to perform to their optimum strength and potential to expand their operations. Unfortunately, when you conduct business with a large number of buyers, there may be a few clients who cannot fulfill their payment obligations. While most of them do not intentionally default on their payments, they may face issues beyond their control. This may be particularly common in export trades.

What is Credit Insurance?

In its simplest of forms, credit insurance protects your receivables from non-payment. The purpose of trade credit insurance, as defined on our Credit Insurance service page, is to protect businesses and avoid financial losses due to unpaid accounts receivables, customer default accounts or even customer bankruptcy. Additionally, it allows your organisation to offer attractive and flexible credit terms while protecting their cash flow.

Generally, trade credit insurance enables businesses to:

• Secure accounts receivable and protect their balance sheet.
• Ensure profitability by mitigating the credit risk.
• Extend goods and services to new clients to increase market share.
• Protection against the political risks associated with export trades.

Which Businesses Benefit from Trade Credit Insurance?

Whether you are a local startup or a global investor new to the UAE, businesses of all sizes, across a wide breadth of industries, can benefit from credit insurance. Essentially, any company that sells goods or services, and/or extends credit to customers are the best candidates for credit insurance.

While all businesses operating in high-risk industries will benefit from credit insurance, some industries, such as mining, energy, metals, and automotive companies, benefit the most from trade credit insurance.

When deciding if your company will benefit from credit insurance, consider if the total amount of your accounts receivables are enough to impair your products, services or your business as a whole. The last thing you want to do is to wait until your accounts are unpaid to purchase trade credit insurance. As at this point, it may be too late or they may end up paying higher rates due to elevated risks.

Improve Banking Relationships and Access to Finance

In general, credit insurance helps bridge the gap between companies and the banking industry. Not only does holding credit insurance help to improve access to bank funding, in many cases if grants access to more favorable lending terms. Essentially, when receivables are insured it subsequently impacts positively on cash flow.

Credit insurance is easier to administer and more affordable than issuing a standard letter of credit. This allows an organisation to conduct their business more freely on a global scale with on open credit terms. Additionally, credit insurance can help a policyholder qualify for larger credit lines against better terms.

Why Is Credit Insurance a Sound Investment?

Aside from the financial protection credit insurance offers a business, many companies have leveraged their credit insurance as an investment platform to help their businesses grow. For example, businesses can use trade credit insurance as a credit line to offer to clients and to also sell to international entities, which can help make businesses larger, stronger, and even expand geographically while simultaneously reducing risks.

Credit risks are a common ingredient of any business. Credit insurance policies mitigate the dangers associated with credit risks. Other benefits of credit insurance, including:

• When you build your balance sheet on the foundation of credit insurance, you will provide confidence to your shareholders and stakeholders.
• Credit insurance allows you to provide your clients with favorable financing terms. When their terms are favorable, buyers gain confidence in favorable credit terms.
• When your balance sheet shows an increased value of accounts receivable, you may have increased access to finances.
• Credit insurance policies effectively complement existing organisational systems and procedures in place for credit management.

If you are interested in learning more about how credit insurance can protect your business, contact the professionals at Petra Insurance.