Businesses that supply goods or services on credit face a fundamental risk: the customer may not pay. Two tools address that risk in very different ways. Trade credit insurance is a before-the-event product that limits the financial impact of non-payment across a portfolio of customers. Debt recovery is an after-the-event service that pursues a specific debt that has already gone bad. The distinction matters when you are deciding how to manage your credit risk.
Trade credit insurance explained
Trade credit insurance (sometimes called accounts receivable insurance or export credit insurance for cross-border trade) is an insurance product that indemnifies a supplier against loss caused by a customer's failure to pay. It covers two principal events:
- Insolvency — the customer enters voluntary administration, liquidation or bankruptcy before paying.
- Protracted default — the customer simply does not pay within a specified period (typically 90–180 days after the due date), regardless of whether insolvency has occurred.
The insurer typically indemnifies the insured for 80–90% of the insured invoice value (the insured retains a co-insurance percentage). The insurer sets credit limits for each buyer, which the insured must operate within to maintain cover. Exceeding an approved limit — or supplying to an unapproved buyer — may void the cover for that transaction.
How debt recovery works
Commercial debt recovery is the process of pursuing a specific overdue account on behalf of a creditor. A recovery agent contacts the debtor, negotiates payment, and — where necessary — coordinates legal action. The agent is typically paid on commission: a percentage of what is actually collected. If nothing is collected, there is no fee.
Unlike insurance, debt recovery is reactive — it applies to accounts that are already in arrears. Its strength is that it can work on aged, disputed and difficult accounts that an insurer would never have covered. Its limitation is that it depends on the debtor having the capacity and willingness to pay, which no process can guarantee.
Cost comparison
The cost structures are fundamentally different:
- Trade credit insurance costs a premium calculated as a percentage of insured turnover — typically 0.1–0.5% of annual insured revenue, depending on the industry, the customer base and the level of cover. You pay this regardless of whether any customer defaults. If a claim is paid, you also bear the co-insurance retention (the uninsured percentage).
- Debt recovery costs nothing unless a debt is collected. The commission is a percentage of the recovered amount, agreed in advance. There are no upfront premiums and no ongoing costs.
For a business with a broad customer base and significant credit exposure, insurance can be highly cost-effective even if no claims are ever made — the premium buys certainty. For a business with a small number of accounts and sporadic bad debts, commission-based recovery is typically more efficient.
What credit insurance doesn't cover
Credit insurance has important exclusions that are frequently misunderstood:
- Disputed debts — most policies exclude debts that are subject to a genuine commercial dispute. If the customer claims the goods were defective or not delivered, the insurer will typically not pay until the dispute is resolved.
- Unapproved buyers or excess over credit limits — supply beyond the approved credit limit is not covered.
- Pre-existing overdue debts — insurance is not retrospective. You cannot insure a debt that is already overdue at the time you take out or renew the policy.
- Political risk (for domestic policies) — domestic credit insurance generally covers commercial risk only, not government action or currency restrictions.
Understanding these exclusions is essential before relying on a policy in a specific situation.
Using both together
Many well-run businesses use both: credit insurance to manage their portfolio-level risk on current receivables, and a debt recovery service for accounts that become overdue or fall outside insurance cover (e.g. due to exceeding the approved credit limit or the dispute exclusion). The two are complementary rather than competing.
Some insurers also have arrangements with debt recovery agents to pursue claims that the insurer has paid out — meaning the insurer recovers what it can from the debtor and reduces its net claim cost. If you hold a credit insurance policy, check whether your insurer expects you to cooperate with their recovery efforts on paid claims.
Which is right for your business?
Consider trade credit insurance if:
- You have a broad customer base and significant aggregate credit exposure.
- Your industry has higher-than-average insolvency rates (construction, retail, hospitality).
- Your bank requires insurance cover as a condition of an invoice finance facility.
- You export to markets with higher credit risk.
Consider debt recovery if:
- A specific account is already overdue.
- The overdue amount is not covered by insurance (dispute exclusion, excess over limit).
- You want to pay only for results — not an ongoing premium.
- You have a handful of significant accounts rather than a broad portfolio.
This guide is general information only. It does not constitute financial, insurance or legal advice. Trade credit insurance products vary significantly — read your policy carefully and consult a specialist broker before relying on cover for any specific transaction.