Understanding The Types Credit Insurance For Businesses

30 January 2023 by Elijah Steward

Financing and payments are central to the cash flow of a typical business. Consequently, many organizations face credit risks from multiple directions. While insuring credit risks is a less common solution, there is a time and place for it. If you're dealing with one of these four risks, you might want to examine the available commercial insurance options.

Accounts Receivable

Many businesses effectively spread their risk on this front by serving many customers. However, some firms are dependent on a small number of major customers. This can reach the scale of significant credit risk, especially if you have to invest lots of time, materials, labor, storage, and transportation in each deal.

A company that repairs heavy industrial equipment, for example, could face significant risks through accounts receivable. If a customer's business goes under before they finish paying for a project, that could leave the repair business with major financial exposure.

Trade

Risks on this front are essentially more complex versions of the risks associated with accounts receivable. Export-import businesses have the most need for commercial insurance against trade problems. Political instability, shifting currency markets, commercial disputes, and foreign bankruptcies all add layers of difficulty and risk.

Suppose 25% of your operations are in one overseas nation. The government decides to expropriate your property one day. Ideally, you'll have commercial insurance to cover the property and loss of trade.

Contingent Credit

One of the greatest periods of financial exposure for a business is when it's engaged in restructuring activities. Mergers and acquisitions can create notable credit risks, especially if the deals collapse. The parties can acquire contingent insurance to cover associated credit costs.

Companies also can acquire contingent insurance for large financial transactions. A construction company that depends on a supplier for a major commodity for a project might seek insurance in case the arrangement falls through. Especially if there is a third-party risk with an institution like a bank financing a project, this kind of insurance can protect against adverse scenarios.

Digital Risks

Most businesses rely on digital transactions for at least part of their financial activities. What happens if databases go down or someone breaches a system's cybersecurity? Events can lead to data losses, regulatory exposure, disrupted transactions, and even lawsuits from customers over compromised financial information.

A commercial insurance agency can study your company's digital profile. Your agent can then develop a policy that'll guard against catastrophes involving computers, servers, mobile devices, and other digital systems. 

For more info about commercial insurance, contact a local company. 

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