by Heather Smart Johnson
We define all the technical terms associated with business credit insurance, trade credit insurance, and accounts receivable insurance.
Accounts Receivable: Money owed to your company by your customers.
Coverage: The percent of the risk assumed by the insurance company — typically not to exceed 85% – 90% of the loss. Trade credit insurance policies never cover or pay 100% of the owed debt.
Credit Insurance: Also known as trade credit insurance, business credit insurance, and accounts receivable insurance. An insurance policy that covers your accounts receivable, reducing the payment risk that results from providing goods or services on credit.
Credit Limit: The maximum amount that your customers can purchase on credit in order for your company to be in compliance with your credit insurance policy.
Domestic Accounts: Your customers that have their principal place of business in the same country as your principal place of business.
Foreign Export Accounts: Your customers that do not have their principal place of business in the same country as your principal place of business. These customers are often supported by a letter of credit or a trade credit insurance policy.
Indemnification: Refers to compensation for loss. In regards to business credit insurance, it refers to the mitigation of accounts receivable risk and the ability to still get paid when your customer does not pay as agreed.
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Insolvency: The inability of your customer to pay their debts.
Non-Acceptance of Goods: When your customer declines to receive the goods you shipped via an agreed-upon purchase order without just cause.
Political Risk: Refers to situations that result in non-payment under an export contract due to the actions (or inaction) of the government in your customer’s country. Examples may include currency inconvertibility, transfer of payment, war or civil disturbance, confiscation, expropriation, and nationalization.
Premiums: The amount paid for credit insurance, generally charged monthly. Premiums will vary based on coverage but do not increase if you choose to use a broker.
Protracted Default: When your customer does not pay within the terms of the sale and you must pursue legal action.
Right of Subrogation: A contractual right that allows the insurance company to try and collect the debt directly from your customer once they have paid the claim.
Risk Management: The forecast and evaluation of risk combined with strategies to avoid or minimize its effect on your business.
Scope of Coverage: What will be covered in the trade credit insurance policy. Your company can choose whether to include foreign and/or domestic accounts and specific customers to include and/or exclude. A broker can help you figure out what is best for your situation.
Terms of Business: Similar to credit limits, these are limits put on transactions with your customers in order to be insured, such as maximum invoicing period and maximum payment period.
Underwriting: The process through which a business credit insurance company takes on the financial risk of your accounts receivable for a fee known as a premium
Waiting Period: The amount of time between the payment due date and when the insurance company will pay for the loss. During the waiting period, usually 60 – 180 days, your company must make a substantial effort to collect the debt.
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