Creditinsurance
Credit insurance covers the insured from financial losses that arise from a customer’s failure to pay for goods or services on time. Such insurance is often called credit risk insurance, debt insurance or trade credit insurance.
Credit insurance can be divided into three broad categories: consumer credit insurance, mortgage credit insurance and small business credit insurance. Consumer credit insurance, the most widely used type of credit insurance, provides coverage for receivables such as cars, furniture, jewelry and other consumer credit purchases. Mortgage credit insurance provides coverage for mortgages with the homeowner in default or facing foreclosure. Small business credit insurance, most commonly used in international trade, offers protection against nonpayment of receivables due to customers or international markets experiencing currency devaluation, political upheaval or economic difficulties.
The purpose of credit insurance is to reduce the business risks associated with granting credit to customers. Without credit insurance, businesses may be unable to offer credit terms to customers due to the uncertainty of customer payment. Credit insurance provides assurances to businesses that if their customer cannot pay, they will receive at least partial compensation. This enables businesses to offer more competitive terms of credit to customers, potentially increasing sales and turning one-time customers into long-term relationships.
Credit insurance can cover the entire customer base or be applied to specific customers based on a variety of criteria including reliability, payment history and size of order. Coverage can be tailored to offset certain risks associated with certain types of transactions such as foreign exchange or political instability.
For businesses accepting credit payments, credit insurance can also provide additional benefits, including access to funding to manage cash flow and reduced paperwork. Credit insurers will typically guarantee payment within a few days of the customer’s default or nonpayment if the proper claim paperwork has been submitted.
For consumers, credit insurance can provide an additional layer of protection if a customer is unable to make payments. Credit insurance often pays the customers outstanding debt in the event of death, disability or unemployment in order to protect the customers family from having to pay the balance themselves.
In summary, credit insurance provides businesses and consumers with an important layer of protection against financial losses due to customer default or nonpayment. This coverage can ensure that businesses can extend credit terms to customers who may not be able to pay without the extra assurance of coverage, thus enabling greater customer loyalty and increased sales. Additionally, for consumers, credit insurance can help protect their families from needing to pay for their debts in the event of death, disability or unemployment.
