Why do companies in China need credit insurance?
Credit insurance can be seen as a tool to transfer risks related to non-payment of accounts receivables to insurer. It is a tool to manage risks associated with coordination of cash flow of the company, being part of the management of the risks of the company. Credit insurance, it is an addition to proper credit risk management strategy. It does not replace of precautionary measure a company may take when it comes to trade of goods or service with third parties. The first step regarding the credit risk management is to have a good understanding of the potential buyers about their financial capability and situation. Insurance provide a cover in case of loss such as bankruptcy, political risks, etc.
Examples of claims for the credit insurance?
On arrival of the goods at the final destination to the consignee, the retailer declines to receive the goods because of tight cash flow. So the seller requested to the buyer, to the retailer, to take with of his goods within a certain term of time, which was about thirty days. Otherwise he has to resell the good. So the retailer, the buyer, should be liable of all the potential loss. Buyers did not take receipt of the financials, so the seller asked to sell these goods with discounts, thus suffering financial loss. It was indemnified by the insurer. And the loss was paid about 100 thousand USD.
What is an invoicing period? How long is the general maximum invoicing period?
So the credit granted to the buyer are covered from the date if it is the day that the good is delivered or dispatched, or it is service, on the performance of the service for which the payment is due. Let us give the definition of dispatch. Dispatch means the good is passed to the first independent carrier, for instance, when loaded onto the truck of the transport company. Or, if there is independent carrier, when the good is in position of the buyers’.
What is a credit period? How long is the general maximum credit period?
This is the period in which a seller must issue the invoice to the buyer. Usually the invoice must be issued within 10 days from the date the good is dispatched or delivered or if this is a service, the provision of the service is performed, are delivered to the carriers.
What is an extension period?
This is the period specified in the policies, which the insurer can postpone the original due date of the payment of the invoice. Basically, this is extending the period the buyers can pay the invoice. It must be included in the maximum credit period. In other words, this is an additional payment to the terms of payment granted by the buyers. Usually the maximum period extension is about 40 days, so it means if the payment terms, is granted by the buyer, is 90 days. The period of credit limit would be 120 days.
In case of a risk, when shall the delivery of goods stop? Are delivered goods covered after the expiry of maximum credit/extension period?
The insurer must stop delivery of good if after the maximum credit period, invoices haven’t been paid. If he continues to deliver a good, it would not be covered by the insurance.
Can the insured prepare claim materials and get the indemnity right after notifying the insurer overdue non-payment?
The insured can prepare claim materials and get indemnity only on expiry of the waiting period, which is usually thirty days from the date of expiration of the credit period.
These insights were originally shared on episode 25 and 26 of the China business podcast Daxue Talks. View the episodes below!
Contact Asian-Risks to find your ideal credit insurance plan in China!