What is credit insurance?
Credit insurance is a policy that shifts the risk associated with issued credit from a business to an insurer. For example, companies that offer goods or services in credit need to insure against insolvency, defaulting, late payment, and other factors that may lead to bad debt. Such a business hires an insurer bound by a policy to cover debts not met by the customers at the agreed terms.
What does credit insurance do?
Credit insurance provides the policyholder with guaranteed protection from non-payment of either current or future debts accrued with customers for a fee. Depending on the type of policy acquired, credit insurance may comprehensively cover the business from its entirety of credits or specific customers for the agreed duration. If a client defaults on the payment terms, the policyholder can legally apply for reimbursement for part or whole of the owed credit, depending on the type of policy. Some insurance companies opt to collect the debt from the customers on behalf of the businesses. Others may choose first to pay the company off the owed credit and then follow up with the customer to get a refund. Either way, the policyholder has a guarantee that all credits eventually settle.
Why one may need credit insurance.
The primary reason one may need credit insurance for their business is to protect it from bankruptcy resulting from bad debts. Also, credit insurance companies often profile the creditworthiness of clients within a business to establish their credit limits. Such information is vital for companies in regulating credit to their consumers. It becomes easy to determine when particular credit is too high a risk on a specific consumer. In addition to outsourcing another party to bear the risk of their credit, business profits from credit insurance by cultivating a lending-pay relationship with its consumers, often attracting more clients.