The COVID-19 pandemic has posed significant challenges for supply chains globally, leading to delays in the flow of raw materials and finished goods. This includes food, packaging materials and materials used for farming and building — not to mention products to be shipped, whether across state lines or international borders.
Supply chain backups have left many agribusinesses and suppliers in a bind. Lacking necessary raw materials, agribusinesses cannot fulfill their orders and get paid on time. Products delayed in transit may not get to buyers before spoiling.
Trade credit insurance offers a solution.
What is trade credit insurance?
Trade credit insurance, also know as accounts receivable insurance, protects businesses from non-payment of commercial debt. When customers suddenly can’t pay large invoices or if a business is trying to attract new clients, trade credit allows protection against their customers’ balance sheet risks and delays in shipment.
During COVID-19 school shutdowns, for instance, dairy producers selling milk for school district lunch programs no longer had buyers. In some cases, milk was thrown out. Trade credit insurance covers the risk when an agribusiness can’t collect on deliveries because the customer cannot pay or cannot take the delivery.
Trade credit coverage also provides a safeguard for political risk to agribusinesses that face financial loss due to political events. If political events prevent a buyer in a foreign country from making a payment, or if goods cannot be taken on delivery or ports are closed, trade credit insurance helps protect against losses.
Trade credit insurance comes in two forms, transit cargo and stock throughput insurance:
- Transit cargo insurance covers a business’ goods during domestic transit. The product is covered against physical loss or damage to freight during a shipment.
- Stock throughput insurance covers imports, exports and distribution worldwide. Stock throughput insures inventory and the flow of goods from the source of production to its final destination, whether in storage or at a retail store. The policy provides coverage for all inventory no matter how it’s transferred, covering product awaiting shipment and in transit.
Trade credit coverage reimburses insureds for the cost of the product but can include selling price coverage or the retail price the agribusiness negotiated with its buyer.
Trade credit coverage provides financial and risk flexibility
Agribusinesses need trade coverage insurance for many reasons. Here’s three reasons why buying coverage makes sense:
- Trade credit coverage is scalable. Trade credit coverage can insure a single product at a time; it can insure the top 50% of accounts receivables or all of it. This allows agribusinesses to gain financial flexibility while ensuring they’re backed up.
- Trade credit coverage targets bigger risks. Agribusinesses can target coverage for their biggest risks, such as customers abroad or referrals for new customers. Like being scalable for finances, trade credit insurance gives agribusinesses maximum flexibility over risk management.
- Trade credit insurance can cover a total loss. Trade credit policies typically pay total amount of the accounts receivable, minus a 5% deductible. For example, a policy covering a shipment of $1 million delayed in transit, becoming unsalvageable, covers $950,000 of the loss. Often, the carriers will allow an insurance holder to resell a product elsewhere to become whole.
Contact your HUB Agribusiness expert for more information on trade credit insurance.