Trade Credit Insurance: Protecting Your Business Against Bad Debt

How trade credit insurance works

You pay a premium — usually calculated as a percentage of your insured turnover — and in return the insurer agrees to cover a proportion of your trade receivables if a named customer fails to pay. The insurer sets a credit limit for each of your customers after conducting its own credit assessment. Invoices within that limit are covered; invoices above it are not, unless you seek and receive a higher limit. When a customer enters insolvency or exceeds the agreed overdue period, you make a claim and the insurer pays the agreed indemnity percentage.

Whole-turnover versus single-buyer policies

A whole-turnover policy covers your entire customer book, subject to individual credit limits. It is the most common structure and allows the insurer to spread risk across your debtor ledger. A single-buyer (or named-buyer) policy insures exposure to one specific customer — useful when your business is heavily dependent on a small number of large accounts. Single-buyer cover tends to be more expensive per unit of exposure and can be harder to obtain if the buyer's credit quality is borderline.

The relationship with invoice finance

Many invoice finance providers and banks look favourably on trade credit insurance because it reduces the risk of losses on the receivables used as collateral. Some invoice financiers offer discounted or integrated credit insurance as part of their facility. If you run an invoice discounting or factoring arrangement, check whether your lender has a preferred or panel insurer — the terms can be more competitive than buying a standalone policy.

What trade credit insurance does not cover

Disputed invoices, where the customer contests the debt, are generally not covered until the dispute is resolved in your favour. Contract frustration, foreign exchange losses, and bad debt arising from your own contractual breach are also typically excluded. Read the policy exclusions carefully and ensure your credit-control procedures — particularly notification of overdue accounts — meet the insurer's requirements, as failure to notify promptly is a common reason for declined claims.