Asked in InsuranceCommercial Insurance
What is credit risk insurance?
October 04, 2009 10:41AM
While I have rarely heard it called "credit risk insurance",
that is an accurate descriptive name for what is normally called
"business credit insurance" or just credit insurance. The term
"business credit insurance" differentiates it from consumer credit
insurance (credit life, credit health, etc).
So, what is it?
Business credit insurance is a type of property and casualty insurance that is purchased by businesses that sell to other businesses on open credit terms. The insurance protects the business's accounts receivable (often the business's largest and most vulnerable asset). The insurance guarantees against excessive bad debt losses.
Businesses purchase business credit insurance for many reasons.
- The most obvious reason is to protect that large, vulnerable business asset. You insured every step of the cycle to get to the point where your finished product has been delivered to someone else (out of your control). All of the work you have done: from finding the prospect, selling the product, making the product, storing the product, to shipping the product has been invested and you want to assure that you get paid for it all.
- There are several other reasons businesses purchase business credit insurance e.g. they are able to safely increase their sales; they sometimes use the insurance in combination with accounts receivable financing to protect & improve their cash flow; they use the insurance company as a third party credit clearing house (guaranteed), and probably other reasons.