Trade credit insurance: what it covers and who carries it
Cover for unpaid trade receivables where a customer becomes insolvent or fails to pay.
Data as at · refreshed by scripts/seed-graph.mjs
In short
- Trade credit insurance covers unpaid receivables where a customer becomes insolvent or fails to pay within a defined period.
- It is written around a credit management process, not simply attached to a debtors ledger.
- Cover on any one customer depends on a credit limit the insurer sets, and that limit can be withdrawn.
Trade credit is the cover for the risk that a customer does not pay. It matters most to businesses selling on terms into concentrated customer bases, which describes a great deal of Australian wholesale, manufacturing and subcontracting.
It is unusual among business covers in that the insurer takes an active view on individual customers and adjusts it during the policy period.
Also called: trade credit, credit insurance, debtor insurance
How the cover operates
The insurer approves credit limits on named customers and covers approved balances within them. Selling beyond an approved limit is generally at the business’s own risk.
The policy also imposes process: reporting overdue accounts by a deadline, ceasing supply in defined circumstances, and taking collection steps. Missing those steps is a common reason cover falls away.
What happens when a limit is withdrawn
Insurers reassess customers continuously. A limit can be reduced or withdrawn during the period, and the effect is a live commercial signal about a customer that the business may not have had otherwise.
It also means cover cannot be assumed to persist for the whole period on any given account.
What people get wrong about it
The first error is treating it as a guarantee that all debtors are covered. Only approved balances within approved limits generally are.
The second is assuming a dispute about the goods is an insured non-payment. Disputed invoices are usually excluded until the dispute is resolved.
The third is discovering the reporting deadlines after an account has already gone quiet.
Questions
- Are all my customers covered?
- Generally only those the insurer has approved, and only up to the limit set for each. Balances above an approved limit, or on unapproved customers, usually sit with the business.
- Does it cover a customer who is disputing the invoice?
- Usually not while the dispute is on foot. The cover is written for inability to pay rather than for commercial disagreement.
Occupations that commonly carry it
Ordered by how central this cover is to each occupation in the graph. A pattern in the data, not a statement that any business is required to hold it.
- Wholesalers and distributors — Supply of goods to other businesses, carrying products liability down the chain.
- Manufacturers — Making and finishing goods for sale, where the product carries liability past the gate.
Sources
- Moneysmart (ASIC) — General guidance on business insurance from the regulator’s consumer site. A starting point, not a definition of this cover.