Trade Credit Insurance

Trade credit insurance protects a business against the financial loss that arises when a customer fails to pay for goods or services. If a customer becomes insolvent or defaults on payment beyond an agreed period (known as protracted default), the insurer pays a claim — typically covering 75% to 95% of the invoice value.

For businesses that sell on credit terms, trade credit insurance is a direct defence against credit risk and the damage that bad debts can inflict on cash flow and profitability.

How Trade Credit Insurance Works

The Basic Process

1. You take out a policy with a trade credit insurer
2. The insurer assesses your customers and sets a credit limit for each one
3. You trade on credit within those limits
4. If a customer fails to pay, you notify the insurer
5. After a waiting period (typically 30-180 days from the due date), you submit a claim
6. The insurer pays the claim, minus the excess (the uninsured percentage you retain)

Key Policy Terms

What Trade Credit Insurance Covers

Covered Risks

What Is Not Covered

• Disputes — If the customer refuses to pay because of a legitimate dispute over quality, delivery, or contractual terms
• Pre-existing debts — Debts that were already overdue when the policy started
• Unnotified credit — Sales to customers without an approved credit limit
• Related-party transactions — Sales to your own subsidiaries or associates
• Non-commercial risks (domestic policies) — Standard UK policies do not cover political risk unless specifically added

Types of Policy

Whole Turnover

The most common type. It covers all (or substantially all) of your accounts receivable . Every customer is assessed, and the insurer monitors their creditworthiness throughout the policy year.

Advantages: Comprehensive protection, lower per-customer cost, portfolio monitoring by the insurer.

Disadvantages: Must insure all customers (not just the risky ones), can be more expensive overall for businesses with very low default rates.

Selective / Key Account

You choose which customers or sectors to insure. This is useful if you have a small number of high-value customers where the loss from a single default would be significant.

Advantages: Lower premium (fewer customers covered), targeted protection.

Disadvantages: Higher per-customer cost, no portfolio-wide monitoring.

Single Risk

A policy covering a single transaction or a single customer over a defined period. Commonly used for large export orders or one-off projects.

Advantages: Specific, no commitment to insure all customers.

Disadvantages: Most expensive on a per-transaction basis.

Costs

Trade credit insurance premiums are typically calculated as a percentage of insured turnover:

For a business with £2 million of insured credit sales, a premium of 0.5% would be £10,000 per year. The actual rate depends on your industry, customer base, claims history, the territories you trade in, and the insured percentage.

What Affects the Premium

Benefits Beyond Claims

Trade credit insurance provides value beyond the claims payout:

• Credit intelligence — Insurers monitor your customers’ financial health and alert you to deteriorating creditworthiness before a default occurs
• Confidence to grow — You can offer credit terms to new customers, enter new markets, and extend larger credit limits with the safety net of insurance
• Better bank facilities — Banks and invoice finance providers often lend more or on better terms when receivables are insured
• Professional collections — Many insurers include a debt recovery service, chasing overdue accounts on your behalf
• Improved cash flow forecasting — With insured receivables, you can predict cash flow more accurately

Major UK Providers

When Trade Credit Insurance Makes Sense

Consider trade credit insurance if:

• A single customer default would have a material impact on your cash flow or profitability
• You are growing and taking on new customers whose creditworthiness is unknown
• You sell to customers in higher-risk sectors (e.g. construction, retail, hospitality)
• You export and face additional political and currency risks
• Your bank or invoice finance provider requires it as a condition of lending
• You want professional credit monitoring of your customer base

When It May Not Be Necessary

• Your customers are large, well-capitalised businesses with minimal default risk
• You operate on cash-in-advance or prepayment terms
• Your receivables are small and diversified enough that a single default is manageable
• You have sufficient reserves to absorb bad debts without insurance

Making a Claim

The Claims Process

1. Notify the insurer as soon as you become aware that a customer may not pay (most policies require notification within 30-60 days of the due date)
2. Submit the claim with supporting documentation — invoices, delivery notes, correspondence, proof of insolvency
3. The insurer verifies the claim and confirms the covered amount
4. Payment is made after the waiting period, minus the uninsured percentage

Documentation Required

• Copy of the unpaid invoices
• Proof of delivery or completion of services
• Evidence of the customer’s insolvency or protracted default
• Details of any security held (e.g. retention of title clauses)
• Correspondence with the customer regarding the overdue payment

Accounting Treatment

Trade credit insurance premiums are a business expense and deductible for Corporation Tax purposes. The premium is recorded as:

Debit:  Insurance expense (P&L)
Credit: Bank / Creditor

A claim payout reduces the bad debt loss:

Debit:  Bank
Credit: Bad debt expense (P&L) or Trade receivables

The insured receivables remain on the balance sheet as accounts receivable until the claim is settled.