This page explains what a trade credit insurance policy covers and does not cover on an open account order, for a merchandiser or finance officer deciding whether a receivable needs protecting against the buyer never paying at all. This lesson mainly teaches a risk: an open account sale can fail to be paid, not just paid late, if the buyer's own business fails or refuses to pay, and a credit insurance policy is a promise to cover a share of that loss, never the whole of it and never every cause. Mona, the merchandiser at Delta Garments, checks this on Cedar & Co.'s domestic open account order.
A factory that assumes any insurance policy covers every loss can be badly surprised the one time a buyer actually fails to pay. A factory that never checks a policy's own exclusions can find a real loss falls outside what the insurer promised, while one that assumes no policy is worth the premium can carry a large, uninsured risk on a buyer it barely knows. Without reading what a policy actually promises, a factory cannot tell a risk it has covered from one it still carries alone.
You need: lesson 5.1 is useful background on receivables finance, but this lesson's risk, non-payment, is a separate one from the cash-timing risk lesson 5.1 covers.
By the end of this lesson you can:
Not covered here: turning an unpaid invoice into cash before its own due date (lesson 5.1); whether a discount fee is worth paying (lesson 5.3); choosing between receivables finance and credit insurance together on one live order (lesson 5.4).
| Term | Meaning |
|---|---|
| Trade credit insurance | An insurance policy that pays a factory a share of an invoice's value if an insured buyer fails to pay it, for reasons the policy covers. |
| Non-payment | A buyer failing to pay a confirmed, undisputed invoice at all, as distinct from paying it late. |
| Coverage percentage | The share of an insured invoice's value the insurer pays if the buyer does not pay; commonly around 90%, always confirm your own policy's stated figure. |
| Self-insured retention | The share of an insured invoice a factory carries itself, uninsured, equal to 100% minus the coverage percentage. |
| Credit limit | The maximum amount an insurer agrees to cover on sales to one named buyer; a sale above this limit is not insured for the excess. |
| Open account | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
Trade credit insurance protects a factory against a buyer's non-payment, not against late payment, a quality dispute, or a cause the policy states it excludes. The insurer agrees a coverage percentage in advance, commonly around 90% of the invoice's value, always confirm your own policy's stated figure, and a credit limit on each named buyer; the factory itself carries the remaining share, the self-insured retention, as an incentive to keep checking the buyer's own creditworthiness rather than relying on the insurer alone. A loss outside the policy's stated causes, or above the buyer's own credit limit, is not covered at all, whatever percentage the policy quotes.
| What can differ | The shapes you meet | Why it matters |
|---|---|---|
| Domestic, Make to Stock | Cedar & Co. buys from Delta Garments on 60-day open account for its own 12 shops; a policy on this receivable would cover Cedar & Co.'s own business failure, not a dispute over the goods themselves. | Domestic buyers can fail too; credit insurance is not only an export tool, though the risk is often smaller and easier to check locally. |
| Export, Make to Order | Delta Garments' sale of Order A's T-shirt to Atlas Trading on 90-day open account carries a larger, harder-to-check risk across a border, the shape credit insurance is used for most often. | A longer distance and a less familiar buyer both raise the value of insuring the same kind of open account risk. |
| Export, letter of credit | Order A's usual sale to Northline Apparel is paid by letter of credit at shipment, a bank's own payment guarantee, so credit insurance adds little value there since the bank, not the buyer, already carries the payment risk. | Credit insurance is not needed everywhere a factory sells; it is most useful exactly where no bank guarantee already exists. |
| Other product families | A denim order such as Order B's jeans, sold on open account to a buyer who later disputes the wash quality, tests the line between a covered non-payment and an excluded quality dispute the policy does not pay for. | A dispute over the goods themselves, not the buyer's ability to pay, usually falls outside what a credit insurance policy covers, whatever the product. |
Delta Garments supplies Cedar & Co., a domestic brand with 12 shops, on 60-day open account, an order worth USD 20,000. Mona, the merchandiser, wants to know whether a credit insurance policy the factory holds actually protects this receivable if Cedar & Co.'s own shops underperform and it cannot pay. She reads the policy's own coverage line, confirms Cedar & Co. is a named buyer within its stated credit limit, and calculates what share of the USD 20,000 the policy would actually pay if Cedar & Co. failed to pay at all.
The worked numberThis lesson's worked number uses an illustrative coverage percentage; always confirm your own policy's stated figure before relying on this method on a real order.
A common mistake is treating a credit insurance policy as full protection against any loss on an insured buyer, without checking the coverage percentage, the credit limit, or the excluded causes stated in the policy itself. As the worked number shows, even a policy with a strong 90% coverage percentage still leaves the factory carrying a real, uninsured share of every insured invoice.
This trap costs real money the one time a buyer actually fails to pay. If Delta Garments assumed Cedar & Co.'s full USD 20,000 order was covered and only discovered the USD 2,000 self-insured retention after a non-payment, the factory would absorb a loss it believed was already covered, a gap of USD 2,000 that a five-minute check of the policy's own coverage line would have shown in advance.
A trade credit insurance policy protects a factory if a buyer never pays an invoice, not if the buyer pays late or disputes the goods. The insurer agrees in advance to pay a share of the invoice's value, often around 90%, but never all of it, and only for buyers and causes the policy actually names. The factory itself always keeps a small share of the risk, so it still has a reason to check a buyer's own creditworthiness rather than assuming the policy handles everything. Reading a policy's own coverage percentage, credit limit, and list of exclusions before relying on it is the only way to know whether a real loss is actually covered, rather than finding out only after the loss has already happened.
Mona, the merchandiser at Delta Garments, is asked by the factory's owner whether the USD 20,000 Cedar & Co. order is protected if Cedar & Co. cannot pay. The facts in front of her:
The document Mona reads, the policy's own coverage line:
Should Mona tell the owner the full USD 20,000 order is protected, or that only part of it is, and only for a specific cause? Decide before you open the answer.
She should tell the owner that USD 18,000 is protected against Cedar & Co.'s own non-payment, while USD 2,000 remains Delta Garments' own uninsured risk, and that the cover only applies if Cedar & Co. fails to pay, not if it disputes the goods.
Two facts, together, decide this. First, the policy's own 90% coverage percentage means Delta Garments always carries a USD 2,000 self-insured retention on this order, whatever happens. Second, the policy's own exclusion for a quality or quantity dispute means the cover does not apply at all if Cedar & Co. refuses to pay over a dispute about the goods rather than a genuine inability to pay.
Telling the owner the full order is protected, without naming the USD 2,000 retention or the quality-dispute exclusion, would leave Delta Garments believing it faces no risk on this order at all, when in fact a real USD 2,000 loss, or the entire USD 20,000 if the cause of non-payment is a dispute, could still land on the factory.
This lesson's cost is the self-insured retention set against the premium paid to insure the rest. Delta Garments' own uninsured share of Cedar & Co.'s order is USD 2,000, a real but bounded risk it accepts in exchange for insuring the remaining USD 18,000. An illustrative annual premium of 0.6% of insured turnover on a receivable this size, always confirm your own insurer's stated rate, comes to about USD 120 for this one order, far less than the USD 18,000 it protects if Cedar & Co. actually fails to pay. Comparing the small, certain cost of the premium against the large, uncertain cost of an uninsured non-payment is the reason credit insurance is worth carrying on receivables a factory cannot fully verify itself.
Copy this row into the decision guide's Decide sheet, using the invoice value and coverage percentage for the buyer you are checking.
| Check point | Spec says | Found (your entry) | Result |
|---|---|---|---|
| Insured amount and self-insured retention for the invoice value and coverage percentage you enter | Enter the invoice value and the policy's own coverage percentage into the Decide sheet and record the insured amount and retention it returns |
Download the full working sheet, with Cedar & Co.'s coverage check already filled in, from the link on this course's page.
Download the Receivables finance and credit insurance decision guide (Excel)
1. What does a trade credit insurance policy actually protect a factory against?
2. An invoice worth USD 20,000 is insured at a 90% coverage percentage. What is the insured amount and the factory's own self-insured retention?
3. On a different invoice worth USD 40,000, insured at an 85% coverage percentage, what is the insured amount and the self-insured retention?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Trade credit insurance | تأمين الائتمان التجاري | Assurance-crédit commerciale | Ticari alacak sigortası | An insurance policy that pays a factory a share of an invoice's value if an insured buyer fails to pay it, for reasons the policy covers. |
| Non-payment | عدم السداد | Non-paiement | Ödememe | A buyer failing to pay a confirmed, undisputed invoice at all, as distinct from paying it late. |
| Coverage percentage | نسبة التغطية | Taux de couverture | Kapsam oranı | The share of an insured invoice's value the insurer pays if the buyer does not pay; commonly around 90%, always confirm your own policy's stated figure. |
| Self-insured retention | التحمل الذاتي | Rétention à charge de l'assuré | Kendi üstlenim payı | The share of an insured invoice a factory carries itself, uninsured, equal to 100% minus the coverage percentage. |
| Credit limit | حد الائتمان | Plafond de crédit | Kredi limiti | The maximum amount an insurer agrees to cover on sales to one named buyer; a sale above this limit is not insured for the excess. |
| Open account | حساب مفتوح | Compte ouvert | Açık hesap | A payment method where the buyer pays the factory an agreed number of days after delivery, with no bank guarantee in between. |
You now know what a trade credit insurance policy covers and does not cover. The next lesson returns to receivables finance and shows how to decide whether its discount fee is actually worth paying on a given export order, seen through an export agent's own eyes. Back to the course map