What is credit insurance and how does it work?

Unpaid invoices can put serious pressure on your cashflow.

If a major customer becomes insolvent, pays late, or fails to pay at all, the loss can have a significant negative effect on your working capital and ability to pay your own suppliers. It can also leave you with concerns about continuing to offer trade credit terms to other customers.

Updated: 22.09.26

By Laurence Hill

That is where credit insurance can help. Credit insurance can replace the lost cashflow if a customer fails to pay. However, its value starts much earlier than the claims stage.

Before you offer credit terms, the insurer will assess the customer’s financial strength and advise an appropriate insured credit limit. After that, it can continue to monitor the customer, warn you if the level of risk changes, and adjust the limit.

That means you are not just insuring against bad debt. You are using information to decide who to trade with, how much credit to offer, and when to increase or reduce your exposure.

What is credit insurance in simple terms?

Credit insurance protects your business if a customer does not pay what they owe.

It is used by businesses selling goods or services to customers on trade credit terms. For example, you may supply goods in January and agree that the customer will pay 30, 60 or 90 days later. Until that invoice is paid, your business carries the risk.

Trade credit insurance helps protect you against that risk. The Association of British Insurers describes it as cover against the risk of not being paid for goods or services you sell.

Depending on the type of policy, it protects your business if a customer:

Becomes insolvent
Fails to pay the debt within a reasonable period, known as default.
Cannot pay because of a political or economic event in an export market.

How does trade credit insurance work?

Trade credit insurance is more useful than many businesses realise.

It can help you before a claim is ever needed by facilitating customer checks before you offer credit, monitoring risk while invoices are outstanding, and helping recover money if something goes wrong.

The process usually works in three stages:

Vetting and credit limits
When you apply for cover, your insurer assesses your customers' financial strength. It uses its own data, underwriting intelligence, and market knowledge to decide how much exposure it is sensible to risk, then sets a credit limit for the customer.
For example, an insurer might agree to cover up to £100,000 of trade exposure with one customer, but only £25,000 with another less creditworthy customer. That limit indicates how much of the customer’s outstanding debt is covered under the policy. You may decide to exceed this level set by the insurer. Any exposure you take above the insured limit is at your own risk.
This can be useful before you agree to new terms because you are not relying only on your own checks but also on the insurer’s view of a customer’s creditworthiness.
Ongoing monitoring
A customer may look financially stable when you first agree to terms, but things can change. They may lose a key contract, face funding problems, suffer cash-flow pressure, or become exposed to political and economic risks in another country. Credit insurers monitor customer risk and may warn you if a buyer’s position deteriorates by changing the credit limit.
In some cases, an insurer may reduce or withdraw a credit limit. Although that may be frustrating, it can also be an important early warning. It gives you the chance to reduce your exposure, tighten terms, pause further supply, or request upfront payment. It is important to note that any goods or services supplied whilst the limit was in place remain covered.
Collection and claims
If a customer fails to pay, the next step is usually debt collection. The insurer may help pursue the debt, or advise you to instruct your own debt collection, before a claim is paid. If recovery is not possible through normal credit management, the insurer may instigate legal action or ask you to do the same. If all else fails and the customer becomes insolvent, the insurer will request relevant documentation to ensure you have complied with the policy terms and conditions before paying the claim. Policies typically pay 90% of the insured invoice value.

While credit insurance can help protect cash flow, the policy still needs to be properly managed. You need to understand your policy conditions, such as reporting overdue debts when required, to ensure claims are paid as expected.

What are the main types of trade credit insurance?

There are several types of trade credit insurance, and the right option depends on your customer base, sales ledger, export exposure, and appetite for risk.

Whole turnover insurance is designed to cover your entire sales ledger. This is one of the most common forms of cover and, because the risk is spread across a wider group of customers, whole turnover insurance can often be a more cost-effective way to protect your business, particularly if it has many trade credit accounts.

Major buyer or key account insurance covers selected customers whose non-payment would seriously affect the business. This may be useful if a large proportion of your turnover depends on a small number of customers.

Single-customer insurance covers a specific contract or customer. It is often used where a business has a large, high-value transaction and wants protection for that particular exposure.

Export trade credit insurance protects businesses that trade internationally. It can cover commercial risks, such as customer insolvency, as well as some political risks. These might include government actions, sanctions, currency shortages, or other events that prevent payment.

For some export transactions, private market cover may not always be available. In those cases, brokers may also work alongside UK Export Finance, the UK’s export credit agency, to explore whether support is available.

The main benefits of credit insurance

The main benefit of credit insurance is that it protects your business against bad debt. For many businesses, trade credit insurance is also a tool for growth, funding, and better credit management.

Safer growth

Offering credit terms can help you win and retain customers. However, it also means taking on risk.

Credit insurance can help you decide which customers present an acceptable level of risk, and how much credit to offer them. That reassurance can make it easier to accept larger orders, enter new markets, or offer more competitive payment terms without exposing your business to unmanaged risk.

This can be especially useful when dealing with new customers, overseas buyers, or larger contracts, where a single unpaid invoice could significantly affect cash flow.

Better financing

If you’re looking to borrow, banks and finance providers often closely examine the quality of a business’s sales ledger.

If your debtor book is insured, lenders may view it more favourably. That can support invoice discounting, asset-based lending, or other funding arrangements because the risk of customer non-payment has been reduced and your funding is more secure.

This does not guarantee better finance terms. However, it may strengthen your business's position when seeking funding.

Expert intelligence

Credit insurance gives you access to information that may be difficult to access on your own.

Insurers monitor businesses across sectors and countries. They use large databases, payment information, and specialist credit analysts to assess risk. This can give your business a stronger basis for credit decisions.

A policy can serve as an additional credit control measure, helping you spot risks earlier and avoid customers who may struggle to pay.

How much does credit insurance cost?

The cost of credit insurance depends on your business type, size, and sector, among other factors.

Premiums are usually based on the business being insured, so there is no single price that applies to every business. As a broad guide, premiums may range from 0.1% of insurable turnover to more than 1% for higher-risk businesses or markets.

The price may depend on factors such as:

Your annual insurable turnover
The number and quality of customers you want to insure
Your sector
Your trading history
Previous bad debt experience
Whether you trade in the UK, overseas, or both
Any countries you export to
The level of cover and policy excess
Whether you need whole turnover, key account, single risk, or export cover

The best way to understand the likely cost is to speak to a specialist broker like Alan Boswell Group. We can review your sales ledger, customer profile, and trading arrangements before approaching insurers for terms.

Get help with credit insurance

Credit insurance is a valuable product but is best accessed via a specialist credit insurance broker. Specialist advice will help you understand the options available to you in the market, which markets are right for your business, and the important terms and conditions which you need to comply with to ensure your claims are paid as expected.

Alan Boswell Group’s credit insurance team have many years of experience and can help guide you through the markets, options, and policy management needed to ensure you have the right product at the best price. To discuss your options, contact us on 01223 324233.

Need help with your insurance?

Whether you need a quote, have a general enquiry, or want to talk it through over the phone, we're here to help.

Speak to us: 01223 324233

What is credit insurance and how does it work?

In this article

In this article

What is credit insurance in simple terms?

How does trade credit insurance work?

What are the main types of trade credit insurance?