Credit insurance

Question: I am worried about my customers failing and not settling their accounts. Can I buy credit insurance?

Answer: This is definitely a high priority question entrepreneurs and businesses need to be asking if they haven't considered credit insurance.

You can most definitely obtain credit insurance in the UAE and across the region. Credit insurance is a term used to describe both trade credit insurance and credit life insurance.

In this instance, you are talking about trade credit insurance (business credit insurance) which is an insurance policy and risk management product that usually covers a portfolio of buyers and pays an agreed percentage of an invoice or receivable that remains unpaid as a result of protracted default, insolvency or bankruptcy.

Trade credit insurance is purchased by business entities and can cover up to 90 per cent of a business' outstanding debts in case of insolvency of the customer.

The costs (called a "premium") for this are usually calculated on an annual turnover and can range between 0.15 per cent and one per cent of the turnover.

There are three leading insurers that offer credit insurance products: Coface, Euler Hermes and Atradius. These are fronted by locally admitted insurance carriers.

Some of the advantages of credit insurance include improved cashflow, focused sales effort for secure business growth, support in developing partners safely in new markets, risk avoidance and reduction of bad debt, tighter credit management discipline, help in securing trade finance and better trading relationships with your suppliers.

There are other immediate competitive advantages to having credit insurance such as up-to date information on the creditworthiness of the businesses you are trading with and the ability to identify businesses that face uncertain prospects. Credit insurance will also immediately protect your business against the effects of a customer not paying because of insolvency or continued payment default, or because certain political situations prevent payment. Cashflow is one of the key challenges facing businesses in the global credit crunch.

Insurers offer online credit tools as part of the insurance package. Such tools allow companies to evaluate the balance strength of their customer base and hopefully to avoid potential failures.

It is important to understand that credit insurance insures the payment risk of companies, not private individuals. Policyholders require a credit limit on each of their buyers for the sales to that buyer to be insured. The premium rate is usually low and reflects the average credit risk of the insured portfolio of buyers.

- The writer is Director of General Insurance at Nexus, one of the region's leading financial advisers.

The opinion expressed here is the writer's own, and do not necessarily represent the views of Gulf News. If you have any questions, please email to advice@gulfnews.com