What is Trade Credit Insurance (TCI)?

TCI covers the risk of non-payment of a trade debt, that is, the amount owing to you arising from goods and services you have supplied.

A standard cover for trade credit insurance is insolvency and non-payment of a domestic and export trade. Cover on associated political risks is also available.

When you purchase a TCI policy, you protect the most important aspect of your company's balance sheet - accounts receivables. It therefore secures cash flow and strengthens your liquidity position.

What is the financial impact to a company when buyers fail to pay their debts?

When you are not paid by your buyer, the impact on your company's financial standing can be disastrous. How do you measure impact? It is the loss divided by the profit margin.

For example: if you had a bad debt loss of $50,000 on a 5 per cent profit margin, your real loss is $1 million. This means you will need to sell $1 million to recoup this sale and loss. Simply, the lower the margin, the greater the impact.

What are the key benefits of Trade Credit Insurance?

There are numerous benefits, but the most significant ones are:

• Protecting your cash flow

• Your liquidity does not have to suffer because your buyer has not paid his trade debt.

• Gaining a competitive edge

• It allows you to explore new business opportunities and penetrate new markets with greater confidence, knowing that the possibilities of unforeseen losses are insured and protected by a TCI policy.

• Reducing bad debt provision

• Reducing your bad debt reserves improves the health of your profit and loss statement.

• Increasing your credit lines with lenders

• You can use the TCI to enhance your working capital loans or trade financing with the bank through receivable discounting.

What are the main features of the Export Coverage Scheme (ECS)?

The ECS has two features:

• IE Singapore will subsidise 50 per cent of the insurance premium, subject to a maximum of $100,000 for each eligible Singapore-based company. Eligibility criteria are:

• a) Group turnover of $80 million or less

  b) Have three strategic business functions in Singapore, such as banking and finance, marketing and business planning, procurement/logistics, training and personnel management, investment planning/coordination, research and development, technical support and manufacturing.

• An added feature (currently being finalised) is the excess limit facility, which will provide additional buyer limit capacity to Singapore-based companies regardless of its group turnover.

• ECS was launched on March 1.

  Aon Singapore is the appointed manager and administrator of ECS and works with any Singapore-registered insurance company which could offer the best coverage and structure. Aon Singapore can be contacted on 6221-8222.

For inquiries, visit www.business.gov.sg or e-mail enterpriseone@spring.gov.sg

This article was first published in The Straits Times.