Selling on credit is how most business-to-business trade works. You ship the goods or deliver the service, issue an invoice with 30, 60 or 90 day terms, and wait. Most buyers pay. But when a large customer goes insolvent or simply stops paying, a small company can lose a year’s profit on one invoice. Trade credit insurance in Singapore is one way to protect against that risk. This guide explains how it works, what affects the cost, how claims are handled and when it makes more sense than asking buyers for a letter of credit.
This is general information, not financial or legal advice. Policy terms vary widely, so always read the policy wording and speak to a licensed insurer or broker.
How Trade Credit Insurance Works
A trade credit insurance policy covers your accounts receivable, the money customers owe you for goods or services already delivered. If a covered buyer fails to pay for a covered reason, the insurer pays you an agreed percentage of the unpaid invoice.
The usual building blocks are:
- Covered risks. Commercial risks, such as a buyer’s insolvency or protracted default (simply not paying within a set period after the due date), are the core. Export policies may also include political risks, such as war, currency transfer restrictions or government action that stops a buyer from paying.
- Credit limits. You name your buyers, and the insurer sets a maximum amount it will cover for each. The insurer’s credit team assesses buyers using financial data and its own records, so this is also a useful early warning about risky customers.
- Indemnity percentage. The policy pays a percentage of the loss rather than the full amount, so you always keep some of the risk.
- Deductibles or first-loss amounts. Some policies require you to absorb a set amount of losses each year before cover kicks in.
- Waiting periods and reporting duties. You must report overdue invoices within set timeframes, and the insurer may stop cover on new shipments to a buyer who is already overdue.
Types of Policy to Consider
- Whole turnover: covers all or most of your credit sales. Usually the best value per dollar insured, and it spreads risk across your full customer base.
- Key account or selected buyers: covers only your largest or riskiest customers. Useful when a few buyers make up most of your revenue.
- Single buyer or single transaction: covers one customer or one contract, such as a large one-off export deal.
- Domestic versus export: some policies cover only overseas buyers, some only local, and some both.
What Drives the Cost
Premiums are usually calculated as a small percentage of the turnover you insure, or as a fee per buyer or transaction, but there is no standard rate. Insurers look at:
- Your sector and its typical payment behaviour.
- The countries your buyers are in, and their political and economic stability.
- The quality and spread of your buyers, and how concentrated your sales are.
- Your own loss history and credit control processes.
- Payment terms you offer; longer terms usually cost more to cover.
- The indemnity percentage and deductible you choose.
There may also be fees for assessing new buyers. Get several quotes, ideally through a broker who specialises in credit insurance, and compare the policy terms, not just the premium. A cheaper policy with tight reporting deadlines may pay out less in practice.
Trade Credit Insurance Versus Letters of Credit
A letter of credit is a bank instrument: the buyer’s bank promises to pay you if you present the right documents. Trade credit insurance is a contract between you and an insurer covering your receivables. Both reduce non-payment risk, but they suit different situations.
| Factor | Trade credit insurance | Letter of credit |
|---|---|---|
| Who arranges it | You, the seller, with an insurer | The buyer, through their bank |
| Effect on the buyer | No cost or paperwork for the buyer | Buyer pays bank fees and ties up credit lines |
| Coverage | Your whole book or chosen buyers, on open account terms | One transaction at a time |
| Payment certainty | Pays a percentage after a valid claim, after waiting periods | Bank pays in full if documents comply exactly |
| Main risk to you | Claims rejected for breaches of policy conditions | Documents rejected for small discrepancies |
| Competitive effect | Lets you offer open account terms buyers prefer | Can make you less attractive versus rivals offering credit |
Trade credit insurance tends to win when you sell repeatedly to many buyers on open account, when competitors already offer credit terms, or when buyers refuse to open letters of credit. A letter of credit is often better for a single high-value deal, a new buyer in a higher-risk market, or when you need the bank’s payment promise before shipping. Some exporters use both, insuring regular customers and asking for letters of credit for one-off risky deals. Agreeing who carries which risk and when it passes also depends on the Incoterms in your contract.
How a Claim Usually Works
- Spot the problem early. A buyer misses a due date or asks for extended terms.
- Notify the insurer within the time limit in the policy. Missing this deadline is a common reason for reduced or rejected claims.
- Follow the insurer’s instructions, which may include stopping further shipments to that buyer and starting debt collection.
- Wait out the claims period. For protracted default, the insurer typically pays only after a set waiting period has passed with the debt still unpaid.
- Submit documents, such as the contract or purchase order, invoices, delivery proof and correspondence.
- Receive the payout of the indemnity percentage. If the debt is later recovered, recoveries are shared according to the policy.
Disputes are a key exclusion. If a buyer refuses to pay because they say the goods were faulty or late, insurers generally require the dispute to be resolved before paying. Clear contracts, good delivery records and accurate certificates of origin and shipping documents all help.
Other Benefits Beyond Covering Losses
- Better financing. Banks may lend more against insured receivables, and some factoring and invoice financing providers prefer or require credit insurance.
- Safer growth. You can extend credit to new buyers or markets with the insurer’s credit view behind you.
- Credit discipline. Regular buyer assessments push you to monitor customers and chase overdue invoices.
Is It Right for Your Business?
Credit insurance is most valuable if a single unpaid invoice could seriously hurt your cash flow, if you depend on a few large buyers, or if you export to markets where checking a buyer’s finances is hard. It may be less useful if you sell mostly on cash terms or to government buyers.
Before buying, list your top customers and their outstanding balances, review your past bad debts, and decide how much risk you can absorb. Enterprise Singapore and your bank’s trade finance team can point you to current support schemes and financing options for exporters, and a specialist broker can explain how the main insurers’ policies compare.