Tax Credit Insurance (TCI) is a risk management strategy that protects businesses from bad debts, including bankruptcy, insolvency, protracted default and political risks. Trade Credit Insurance works by providing your business with a financial safety net against bad debts and unpaid invoices. This article talks about everything you need to know about tax credit insurance.

Many businesses in Australia suffered from cash flow fluctuations because of unpaid invoices. This report shows that 92% of Australian SMEs experience cash flow problems at least once a month. Bad debts and unpaid invoices are the main reasons for these unfortunate events. Let’s find out how a Trade Credit Insurance policy can help businesses with these problems.

What is Covered in Trade Credit Insurance?

What Is Trade Credit Insurance And How Does It Work

Trade Credit Insurance covers unpaid invoices because of customers’ bankruptcy, insolvency or protracted default. The coverage of your insurance depends on your provider and selected policy. Cover options usually include single contracts, political risks, special risks, selective accounts, domestic and export trade and whole turnover.

What are the Benefits of Trade Credit?

Apart from securing your accounts receivables, the benefits of trade credit may also include the following:

  • Grow your customer base by offering them flexible credit payment terms
  • Secure cash flow and establish a strong relationship with your business partners, suppliers and employees
  • Create opportunities to improve your trade system and develop or expand your market
  • Safeguard client retention through proper communication and favourable credit terms
  • Improve access and relationship with your bank and other financial organisations
  • Give peace of mind to your company, including stakeholders and board by meeting risk management requirements

Who Needs Trade Credit Insurance

Businesses of all sizes should get a credit insurance policy to provide a financial safety net from bankruptcy or failed invoices. This type of insurance is beneficial for the following industries:

  • Tradesmen
  • Electricians
  • Plumbers
  • Restaurant owners
  • Labourers
  • Manufacturers
  • Brokers
  • Consultants
  • Pharmacists
  • Retail and wholesalers

Trade Credit Insurance

What are the Disadvantages of Trade Credit?

Trade credit may also impose risks. That’s why it’s important to do your research or consult a financial advisor to help you make informed decisions. Some disadvantages of trade credit include:

  • It may require credit management to keep your finances in order
  • It may impose late payment fees
  • It may impose supply chain issues
  • Missed or late payments are usually expensive
  • What are the Three Types of Credit Insurance?

The three types of credit insurance are trade credit insurance, credit property insurance and credit life insurance. Since we have talked about trade credit, let’s discuss the other types of credit insurance:

Credit Property Insurance

This type of credit insurance covers properties you’ve used to secure a loan. The policy can financially compensate an insured property when it’s damaged or lost because of accidents, theft or a natural disaster.

Credit Life Insurance

This type of credit insurance covers your credit card balance if you die, so your family or loved ones do not have to pay your balance out of your estate.

Other types of credit insurance are Credit Disability Insurance and Credit Unemployment Insurance. All these policies are designed to help you prepare for any financial loss in the future.

What are the Procedures for Trade Credit?

Discuss the Credit Terms with your Insurers and Customers.

The insurer needs to assess the financial capacity of your customers to check their risk rating or buyer rating. The key here is to determine whether the customer can pay your invoice in a timely manner.

Check your Banks and Trade References.

Trade credit procedures and policies may vary, so it’s imperative to check your banks and credit grantors to ensure you’re on the right path. For instance, banks and finance organisations usually check the customer’s average cash balances and credit standing.

Visit Reputable Credit Bureaus

Referring to reputable credit bureaus is a smart move for every trader or business owner. Experian, Equifax and Illion are the main credit bodies in Australia. These organisations can provide you with tons of helpful information you need to know about trade credit.

Set Credit Limit

Setting the right credit limit is essential to avoid discrepancies in the future. Starting low is a good option, especially for start-ups. Observe your customers’ transaction history. If you feel comfortable, you can start increasing their credit limit. Again, it’s best to consult a financial expert.

Additional Tip: Use the buyer rating to avoid potentially risky customers. As much as possible, choose customers with strong buyer ratings. You can also offer favourable credit terms to secure potential clients or customers.

Trade Credit FAQs

Does Trade Credit Have to be Paid Back?

Yes, the tax credit has to be paid back but it doesn’t usually include interest. However, you can get penalised for late payments and the fees are usually expensive.

How Long Does it Take for a Tradeline to Fall Off Credit Report?

It may take up to 7 years for a tradeline to fall off the credit report. Experian follows the standard industry and government guidelines when it comes to credit reports. Check the information below for your reference:

Bankruptcies – 9 years and 9 months

Leasing data – 36 months

Trade data – 36 months

Uniform Commercial Code filings – 5 years

Judgements – 6 years and 9 months

Collections  – 6 years and 9 months

Tax liens – 6 years and 9 months

What are the Types of Trade Credit?

A promissory note, trade acceptance and account are the main types of trade credit.

Trade Acceptance: Trade acceptance is a formal document that contains the agreement of credit terms between the customer and the seller.

Open Account: An open account is an informal agreement between the buyer and seller. In this setup, the seller sends the products and an invoice to the buyer.

Promissory Note: A promissory note is a formal document that indicates the agreement of the buyer to the payment terms, including

Is Trade Insurance Worth it?

Yes, trade insurance is worth it for your business. The pros clearly outweigh the cons with careful deliberation. Having a trade insurance policy provides a financial safety net against bankruptcy and unpaid invoices. However, you need to do this strategically. Choose a reputable trade credit insurance provider. Check your finances, so you can weigh your options. You should also prepare resolutions to mitigate possible risks. Consulting a financial expert should help make more informed decisions.

The material offered here is for informational purposes only. It does not constitute legally binding advice and should not be a substitute for a consultation with an insurance expert.

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