What is credit insurance?
When you deliver products or services on account, you naturally want the invoice sent to you to be paid as soon as possible. Unfortunately, the invoice is often paid late or not at all. But what if, for example, your customer goes bankrupt and can no longer pay? What happens to your money then? Fortunately, there are several ways to continue receiving your money during such times. Credit insurance, for instance, can help. But what exactly is credit insurance? How does it work, and how does it differ from factoring?
Credit insurance: what is it?
Do you want to make sure the invoices you send will always be paid? Then, taking out credit insurance is a good option. Unfortunately, it can happen to any organization at some point that a major customer suddenly drops out due to bankruptcy. As a result, a customer’s bankruptcy can also indirectly have unpleasant consequences for you. With credit insurance, you do not run any risks when a customer is unable to pay an invoice sent by you for financial reasons. In such a case, the insurer will ensure you still receive the amount due.
How does credit insurance work?
Do you supply products and/or services to business customers? Then, in most cases, you can take out credit insurance. When you take out credit insurance, you pay a premium over your turnover to the insurance company. If a customer goes bankrupt, for instance, and you are still owed money for work completed earlier, the insurance company will ensure that you are paid the amount in question. Therefore, with credit insurance, you are always insured for financial arrears caused by someone else’s non-payment. This way, you ensure that cash flow keeps running, and you do not end up in financially awkward situations. The credit company then takes over the claim and works to recover the customer’s money.
Who is credit insurance interesting for?
Credit insurance can be beneficial for various types of businesses. It is often thought that credit insurance is only for larger companies, but nothing could be further from the truth. There are different types of credit insurance available. Which type of insurance best suits your situation depends, among other things, on the company’s size and the number of invoices. When taking out credit insurance, you can choose from the following types:
- Debtor policy is especially suitable if you have one customer from whom you receive several larger amounts.
- The transaction policy is especially suitable if you occasionally receive a large amount from a customer.
- Turnover policy, which ensures your entire turnover in one go.
- Credit insurance per country is especially suitable if you mainly receive money from customers from one specific country.
Credit insurance vs. factoring
Factoring and credit insurance are similar in many ways. After all, they are both solutions for receiving payment on invoices when the buying party cannot pay. Yet there are also several important differences. For instance, factoring is a form of financing, and credit insurance is a form of – as the name suggests – insurance. Whereas with credit insurance, you pay a premium based on your turnover, factoring works differently. Factoring is about selling invoices to a factor. In return, you receive payment of the relevant amount by the factor within 24 hours. So, whereas with credit insurance the insurance company only pays out in the event of bankruptcy, with factoring, you get paid within 24 hours, regardless of the customer’s (financial) situation.
