Trade Credit Insurance

What is Trade Credit Insurance?

For most companies, accounts receivable (the money owed by customers for goods or services delivered on credit terms) represents one of their largest assets, yet it is often the least protected.

It’s designed to protect cash flow and the balance sheet against the sudden default or insolvency of a major buyer. Beyond providing a safety net for bad debts, a trade credit policy acts as a proactive credit-management system, providing businesses with real-time market intelligence and monitoring the financial health of their buyers to help prevent losses before they materialise.

Who should consider Trade Credit Insurance?

Businesses which:

Offer trade credit terms (e.g., 30, 60, or 90 days) to commercial customers.
Have customer concentration risk – where a significant proportion of revenue is derived from a small number of customers, increasing exposure to the insolvency or default of a major buyer.
Rely heavily on accounts receivable as a key business asset – where a significant portion of working capital is tied up in outstanding customer debts.
Operate in high-volume, low-margin industries – such as manufacturing, wholesale distribution, agriculture, logistics, and construction materials, where a single, large bad debt can have a material impact on profitability.
Are pursuing domestic or international growth – and wish to safely extend larger credit limits to existing customers, open new accounts in unfamiliar markets, or offer more competitive credit terms to secure large contracts.
Export goods or services overseas – and face additional risks associated with cross-border trade, including unfamiliar credit environments, foreign legal systems, political risks, and currency transfer restrictions.

What does Trade Credit Insurance cover?

Trade Credit Insurance is triggered when an approved commercial buyer fails to pay a valid, undisputed invoice due to specific events, including:

Insolvency – The buyer enters formal liquidation, administration, receivership, or bankruptcy.
Protracted default – The buyer fails to pay a valid debt within a specified timeframe (the “waiting period,” typically 90 to 180 days) past the original invoice due date, without a formal insolvency event occurring.
Political risk – (Typically applicable to export transactions) Non-payment resulting from political or economic events outside the buyer’s control, including foreign government intervention, currency transfer or exchange restrictions, import or export embargoes, war, civil unrest, revolution, confiscation, or the cancellation of required import or export licences, subject to policy terms and conditions.

Following an insured event and depending on the structure of the policy, Trade Credit Insurance may cover a combination of the following:

Indemnity of the loss – Insurers typically indemnify between 85% and 90% of the net debt amount, protecting the vast majority of the cash flow exposure.
Debt collection costs – Some policies may cover approved legal, collection, or recovery expenses incurred while pursuing an insured debt.
Pre-shipment or work-in-progress cover – Protection for costs incurred producing bespoke or specialised goods prior to shipment where a buyer becomes insolvent or suffers another insured event before delivery.

Common policy structures

Trade Credit Insurance is not a one-size-fits-all product. Cover can be structured in several ways depending on the size of your business, your customer base, the strength of your credit rating and how much risk you are willing to retain. The most common structures available are:

Structure	What it covers	Best suited to
Whole turnover cover	Insures your entire accounts receivable ledger — all eligible buyers across your portfolio.	Most businesses. Australian brokers describe it as protecting your entire receivables portfolio against buyer default. Because the risk is spread across all buyers, the per-dollar premium is usually the most competitive.
Key accounts cover	Protects a defined segment of your largest or most important customers rather than every buyer.	Businesses whose main exposure sits with a handful of major accounts. In the Australian market this often comes with the option of non-cancellable credit limits on those key accounts.
Single buyer cover	Insures non-payment by one specific, named customer.	Businesses with a high revenue concentration in a single buyer, or one large contract, where that one default would be material.
Excess of loss	Pays only for exceptional or catastrophic losses above a deductible (first loss) you agree to retain.	Larger businesses with strong, mature internal credit management capable of absorbing a greater share of risk. Australian brokers position it for “customers with excellent internal credit management seeking protection for unexpected or major loss events across their entire portfolio.”
Export credit insurance	Extends cover to international buyers, including political risks such as currency transfer restrictions or government intervention.	Businesses trading across borders (can be added to or combined with the structures above).

Whichever structure you choose, cover for each buyer will generally operate via a credit limit, which represents the maximum approved exposure the insurer will cover for that customer (with claims typically indemnified at 85% to 90%).

What doesn’t Trade Credit Insurance cover?

Common exclusions include but are not limited to:

Disputed debts – If a customer refuses to pay because they claim the goods were damaged, late, or did not meet specifications, the policy will not trigger until the dispute is legally resolved.
Sales to private consumers (B2C) – The policy exclusively covers trade between commercial entities (B2B).
Sales to government or public entities – Sales to government or public sector entities (including departments, councils and statutory authorities) are generally excluded unless specifically agreed by the insurer.
Inter-company or associated trading – Sales to subsidiaries, parent companies, or entities with shared ownership structures.
Sales to known insolvent or overdue buyers – Sales to buyers who are known to be insolvent or who are already overdue.

Important considerations:

Coverage is subject to approved credit limits – Insurers assess the creditworthiness of buyers and typically approve maximum insured credit limits for individual customers.
The policyholder retains a portion of the risk – Most policies indemnify between 85% and 90% of the insured debt, meaning the business retains a small share of any loss.
Coverage may vary between buyers and countries – Available credit limits and policy terms can differ depending on the financial strength, industry, and location of the customer.

Trade Credit claims example

A wholesale distributor of construction materials supplies timber to a mid-sized commercial construction firm on standard 30-day credit terms. Over six months, the construction firm increases its monthly orders, building an outstanding balance of $150,000.

Due to cash flow pressures on a major project, the construction firm enters voluntary administration. The administrator suspends payments to unsecured creditors while the company’s financial position is assessed, leaving the wholesale distributor exposed to a significant unpaid debt.

Fortunately, the distributor holds a Trade Credit Insurance policy and had previously obtained an approved credit limit of $200,000 for this buyer.

Following notification of the insolvency event and successful assessment of the claim:

The insurer indemnifies 90% of the insured debt ($135,000), helping preserve the distributor’s cash flow and working capital.
The insurer’s specialist recovery team manages the debt recovery process, liaising with the administrator and pursuing any available recoveries.
The distributor retains the remaining 10% ($15,000) in accordance with the policy’s co-insurance provision but avoids a substantial financial loss that could otherwise impact profitability and liquidity.

Information required to obtain quotations

An aged debtor’s ledger (accounts receivable aging report).
Historical bad debt history for the past 3 to 5 years.
Total annual insurable turnover (broken down by domestic and export sales).
A list of top 10 to 20 largest buyers and their required credit limits.

How premium is calculated

Typically, this is calculated based on insurable turnover, often around 0.1%-0.5%, though this can vary by industry, creditworthiness, the countries in which you are trading and your claims history.