For an SME, the largest customer often accounts for a third to a half of revenue. As long as that customer pays, this means growth; when it does not – because it has gone bankrupt, been put into liquidation, or has simply “not transferred the money yet” for months – the company's own liquidity is put at risk, while suppliers, wages and taxes still have to be paid. As a broker, I see that most company managers regard this risk as fate, yet customer non-payment is insurable: that is what trade credit insurance is for, which, alongside suretyship, is a separate class of non-life insurance in the annex to the Insurance Act (Bit.). This article is an overview: what it is, how it works, what it does not cover, and what is available to an SME as well.
- Trade credit insurance protects the receivables of a company that sells on deferred payment terms: if a customer becomes insolvent, or payment is still outstanding after the waiting period set in the policy conditions, the insurer pays the proportion of the unrecoverable receivable specified in the policy.
- The structure is similar for every product: the insurer sets a limit for each customer (and may withdraw it), the company reports its insured turnover, strict notification and collection deadlines apply to claims, and the payout is limited by a deductible and an annual maximum – the details differ from insurer to insurer.
- Simplified products sized for SMEs are also available on the market, and for exports the state export credit insurer is also a player; credit insurance is neither property nor liability insurance but the financial layer of the portfolio, the counterpart of surety insurance.
What is trade credit insurance?
Credit insurance covers the receivables of a company that sells on deferred payment terms – against an invoice, at 30, 60 or 90 days. It recognises two insured events. One is the customer's insolvency: bankruptcy, liquidation or similar proceedings, or unsuccessful enforcement. The other is protracted default: the customer does not go under, it simply does not pay, and the waiting period set in the policy conditions expires – one publicly available set of Hungarian policy conditions, for example, specifies the sixtieth day after the payment due date, and for other products it may be longer. In both cases, the insurer pays the proportion of the receivable that has become unrecoverable as specified in the policy, and the remainder stays with the company as its deductible. The insurer pays only for what is an insured event under your contract: a customer's mere delay before the waiting period has expired is not a loss, and a disputed invoice is typically not one either until the dispute is resolved.
How does it work in practice?
Credit insurance is not so much a policy as a process in which the company also has work to do. The insurer rates the customers and sets a buyer limit for each of them – deliveries are insured up to that amount. The insurer may unilaterally reduce or withdraw a limit, citing the customer's deteriorating situation; under the conditions cited above, a withdrawal takes effect on the second working day after the notice is sent, so monitoring limits becomes part of the company's day-to-day operations. The company regularly reports its insured turnover, and the premium is based on it. If a customer does not pay, reporting is subject to deadlines – the conditions cited above require a threatened loss and an insured event to be reported within three working days of becoming aware of it, and the claim to be submitted within fifteen days – and collection of the receivable is typically taken over by the insurer or a collection agency it appoints; one of the real values of credit insurance lies precisely in this service, not only in the payment. Payment comes after the waiting period has expired and the loss has been accepted, reduced by the deductible; Hungarian products typically also stipulate a maximum annual indemnity, often as a multiple of the annual premium. The insurance does not release the company from its own contractual discipline: deliveries above the limit, late reporting or arbitrarily extending the payment term put cover at risk – just as failing to report changes does with other policies.
What does it not cover?
Typical exclusions recur across policy conditions, but their exact scope differs from insurer to insurer. For a disputed receivable – where the customer disputes the legal basis or the amount – the insurer does not pay until the dispute has been settled: the conditions cited above put claim payment on hold in such cases, while other products treat it as an exclusion. Deliveries to an affiliated company or to a customer linked by ownership or other interests are not insured. Also outside the scope are private individuals as customers, prepaid transactions, the portion above the limit, and any receivable that the company reports after the notification deadline. Interest, contractual penalties and the company's own collection costs are typically also left outside. Credit insurance is therefore not a remedy for choosing customers badly but cover against the unexpected failure of a good customer: the insurer's rating of your customers is in itself information about whom it makes sense to grant deferred payment to.
Is it available to an SME?
For a long time, credit insurance was regarded as a product for large exporters, but today several credit insurers on the market offer small businesses simplified, flat-rate-style contracts in which customer rating and limit management take place on an online platform and the premium is linked to turnover. Cover exists for both domestic and export receivables; for Hungarian exporters, the state-owned export credit insurer is also among the possible partners, with its own product types. Which structure suits your company is determined by your customer base, payment terms and customer concentration – not by the size of the company. Two candid remarks: credit insurance does not replace factoring, advance payments or retention of title, but works alongside them; and it is not worthwhile for every company – if the number of customers is large, individual receivables are small and outstanding receivables are under control, reserves and strict payment discipline may be enough. This is worth deciding using the logic of a needs assessment.
Where does it belong in the portfolio?
Credit insurance is the financial layer of the business insurance map. It is not property insurance, because it is not about physical damage; it is not liability insurance, because it is not the company that causes damage to others. Surety insurance is its counterpart, working in the opposite direction: surety insurance secures the company's own performance towards the client, while credit insurance secures the customer's payment to the company. Together, the two cover what the two sides of the balance sheet show – what the company owes, and what it is owed. It should not be confused with business interruption cover: that pays for loss of revenue following physical damage, not following a customer's bankruptcy. From the point of view of continuity thinking, however, the failure of a customer is just as much a “loss” as a fire: the question is what will keep operations going over the following months.
What should you do now?
Work out what share of your revenue comes from your three largest customers, and what part of your receivables has been outstanding for more than 60 days – these two figures show whether there is anything to discuss at all. Review your payment terms and whether your contracts include retention of title or an advance payment. If you request quotes, insurers will ask for a customer list, turnover for recent years and previous bad debts; it is worth putting these together in advance, as I described in the data checklist for requesting quotes. In the comparison, what decides is not the premium but the waiting period, the deductible, the flexibility of limit management, the notification deadlines and the annual maximum. If you contact me with these, I prepare the comparison of the quotes and summarise the essentials of the policy conditions in plain language – the contracts with your customers and the discipline of reporting, however, remain the company's responsibility.
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Sources
- Insurance Act (Bit.) – Act LXXXVIII of 2014 on the business of insurance, Annex 1 (non-life insurance classes: 14. credit, 15. suretyship)
- Magyar Exporthitel Biztosító Zrt. (MEHIB, the Hungarian state export credit insurer) – Insurance of receivables on deferred payment terms, general terms and conditions (product C, 1 June 2020)
- EXIM Hungary (Eximbank and MEHIB) – export credit insurance
- Allianz Trade Hungary – frequently asked questions (product families for small businesses and for medium-sized and large companies)
- Marsh Hungary – Trade credit insurance (general description of the product)
