Trade credit insurance
Contents |
[edit] Introduction
Trade credit insurance or TCI (also known as business credit insurance or credit insurance) is a form of insurance from private companies and government agencies to cover business-to-business transactions, particularly in non-service sectors such as manufacturing and construction. The purpose of this form of insurance is to protect businesses from bad debt.
[edit] History
As a business practice, trade credit insurance emerged in Western Europe between World Wars I and II. It was often applied to transactions between two countries, and political stability was frequently one of the main factors in terms of risk and repayment. Natural disasters, acts of terrorism and currency devaluations or shortages also play a part in the risk associated with global transactions.
Since the 1990s, the trade credit insurance market has been primarily focused on Western Europe, but it is now present in the Americas, Asia and Eastern Europe as well. In the international marketplace, trade credit insurance is referred to as export credit insurance (or ECI), which sets out to reduce the risk of doing business on a global scale.
[edit] Protecting both parties
Both trade credit insurance and export credit insurance are meant to protect vendors from non-payment, should the customer require extra time to fulfil financial obligations. The purpose is to give businesses the confidence to trade with each other even when there is a degree of risk or uncertainty involved.
Trade credit arrangements are conceptually similar to bridging loans, but instead of applying to property transactions between a financial institution and an individual consumer, trade credit insurance applies to transactions between two businesses, and it allows a business to generate income without having to invest in prepayment.
Like bridging loans, the business covered by a trade credit insurance policy will pay an agreed percentage rate for the duration of the arrangement (which is typically within one year). This rate is based on the business history and creditworthiness of the recipient. Premiums for trade credit insurance are typically made in monthly instalments.
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