Trade credit insurance (also called accounts receivable insurance or credit insurance) protects a seller against losses when business customers do not pay. If an insured customer becomes insolvent or defaults for a covered reason, the insurer pays a percentage of the loss.
How it works in factoring
A policy typically sets:
- Which customers are covered, often with an insurer-approved limit for each
- Covered events, such as insolvency and prolonged nonpayment, and sometimes political risks for export sales
- The share of loss reimbursed, with the seller retaining the rest
- Deductibles, waiting periods and reporting deadlines
Credit insurance interacts with factoring in a few ways:
- Supporting recourse factoring: a seller with recourse factoring can insure its receivables, then assign the policy proceeds to the factor. This can make the arrangement easier to approve or improve terms.
- Factor-held policies: some factors offering non-recourse terms carry their own credit insurance, which partly explains how they can absorb credit losses.
- Export receivables: insurance can make foreign customers easier to finance.
Like non-recourse factoring, credit insurance usually does not cover commercial disputes over quality or quantity.
What to check
- Exclusions and the definition of a covered loss
- Deadlines for reporting overdue accounts; missing them can void coverage
- Whether the factor needs to be named as loss payee
- Whether coverage limits match the credit limits you need
A policy is only as useful as the seller's compliance with its reporting conditions.