Your receivables are probably your largest uninsured asset. How trade credit cover works, what the credit limit game really is, and an honest test of whether you need it.
Walk through a typical SME balance sheet and find the largest asset. For most trading businesses it is not the equipment or the stock — it is accounts receivable: money owed by customers who have taken the goods and not yet paid. The building is insured. The stock is insured. The receivables, which may exceed both combined, are usually naked. Trade credit insurance is the product that covers them, and it remains one of the least understood covers in the SME stack.
The direct answer to how it works: a trade credit policy pays you an agreed percentage — commonly 80 to 90 percent — of an invoice your buyer fails to pay, whether because they went insolvent or simply defaulted past a defined waiting period. In export versions, it can also cover political events that block payment. You keep the remaining share as your retention, which keeps you careful about whom you sell to.
The part nobody explains: credit limits
Buying the policy is not the end of underwriting; it is the beginning. For each significant buyer, the insurer sets a credit limit — the maximum exposure they will cover on that name. Sell beyond the limit and the excess is your own risk. These limits move: insurers watch buyer financials continuously and can reduce or withdraw a limit on a deteriorating name for future shipments.
First-time policyholders often experience this as the insurer being difficult. Seasoned ones read it as the product's second service: a live early-warning system on their own customers, backed by the insurer's information and their willingness to put capital behind an opinion. When a credit insurer cuts a limit on your biggest buyer, they are telling you something your sales team does not want to hear — and it is usually worth hearing.
What a claim actually looks like
Suppose a wholesale customer owing you a six-figure sum stops paying. Insolvency claims are the clean case: formal proceedings open, you file with evidence of the debt, and the insured percentage is paid. Protracted default — the buyer is alive but not paying — runs through the waiting period first, typically several months from due date, during which the insurer's collection arm chases the debt. This is deliberate: many late payments resolve, and the collection pressure of an insurer is heavier than a supplier's.
Two disciplines decide whether claims pay smoothly. You must report overdue accounts within the policy's deadlines — sitting on a worsening debtor because they promised to pay next month is the classic way to prejudice cover. And your paperwork must be clean: signed orders, delivery confirmations, invoices matching both. Credit insurance is ultimately insurance on your paperwork.
What it costs and what shapes the price
Premium is usually a small fraction of insurable turnover, and the rate reflects your sector's insolvency climate, your buyer concentration, your bad-debt history, and your terms of sale. Concentration is the quiet driver: a book where one buyer is 40 percent of sales is a different risk from the same turnover spread across two hundred names — and, honestly, the concentrated book is the one that needs the cover most and sometimes struggles to get full limits on the anchor name.
Alternatives, and what stacks with what
- Letters of credit shift risk to a bank but suit large, occasional transactions, not a flow of open-account trade.
- Factoring and invoice finance advance you cash against receivables; non-recourse versions bundle credit protection in, at a materially higher total cost.
- Payment up front is the perfect hedge that loses you the customers who have other suppliers.
- Doing nothing is a real strategy with a real price: one large insolvency absorbed on your own balance sheet.
Credit insurance also has a second-order use SMEs discover late: banks lend more comfortably against insured receivables, so the policy can widen working-capital facilities — sometimes by enough to offset its own premium.
A quick honesty test
You are a strong candidate if at least two of these are true: any single buyer owes you more at a given moment than a bad month's profit; you sell on open account terms of 30 days or longer; your buyers are concentrated in one sector or country; a major buyer insolvency would force you to delay your own payments. If none is true — you sell small amounts to many customers who pay quickly — save the premium.
The product's limits deserve the last word. Trade credit insurance does not cover disputes: if the buyer refuses to pay because they claim the goods were faulty, that argument must be resolved before cover responds. It does not cover sales made beyond limits or after you knew the buyer was failing. What it covers is the honest core of trade risk — the good customer who becomes a bad debt — and for businesses whose balance sheet is mostly promises, that is the difference between a bad quarter and a fatal one.