Every business that sells on credit is in the risk retention business. The question is whether to insure that risk externally, through a trade credit insurance (TCI) policy, or to retain it internally with self-imposed limits and reserves. Most CFOs understand both options in principle, but fewer have a clear framework for deciding which is appropriate for their business, or for managing the governance and documentation requirements that each approach demands.
How trade credit insurance works
A TCI policy indemnifies the policyholder against buyer insolvency or protracted default, typically up to a specified percentage of the approved credit limit (commonly 80–90%). The insurer approves credit limits for individual buyers: you apply for a limit, the insurer's underwriters assess the buyer's financial position, and the approved limit is the maximum you can trade at while covered.
The key operational implication: you cannot simply set whatever credit limit your internal credit team approves. The insurer's approved limit is the binding ceiling for covered exposure. If you trade above it, the excess is uninsured. This creates a strong incentive to integrate the insurer's approval process into your credit workflow, before limits are set, not after.
Premium cost varies significantly by sector, buyer concentration, and your loss history. For industries with higher default rates (construction, retail) or high buyer concentration (a single large buyer represents more than 20% of debtor book), premiums can be material. Claims processes require evidence of a genuine commercial debt, proper due diligence, and compliance with policy conditions, including timely notification of overdue accounts.
Self-insured limits: the internal governance requirement
Self-insured trade credit, where limits are set and managed entirely internally, is common among large corporates, specialty finance companies, and lenders with deep credit expertise. The risk stays on the balance sheet, and the governance burden shifts entirely inward: your credit policy, your approval matrix, your controls, your evidence.
The documentation standard for self-insured limits needs to be, if anything, higher than for insured limits. Without an external insurer reviewing your underwriting, the only check on credit quality is your internal process. Board and audit committees at well-run organisations expect to see: a written credit policy with defined parameters for each limit tier, a documented approval matrix specifying who can approve what level, evidence that the policy was applied consistently to each credit decision, and regular reporting on limit utilisation and debtor book quality.
Self-insured lenders also need robust monitoring, not just at origination but ongoing. A limit set 18 months ago based on a debtor's then-current financial position may no longer be appropriate if the debtor's industry has deteriorated or their payment performance has worsened. A credit monitoring programme that flags material changes such as new bureau defaults, PPSR registrations, and changes in payment behaviour is as important as the original assessment.
How software platforms support each model
A trade credit workflow platform needs to support both approaches without assuming which one the provider uses. For TCI holders, the platform needs to capture the insurer's approved limit alongside the internally-recommended limit, ensure credit officers can see both, and alert when trading approaches the insured ceiling. Policy conditions (notification timelines, documentation requirements) can be built into the workflow as checklist items.
For self-insured lenders, the same platform provides the audit trail that replaces the external insurer's oversight: the evidence pack that demonstrates due diligence, the approval matrix workflow that documents authority, the monitoring alerts that capture changes in debtor risk. The governance burden is internal, but the documentation standard is the same.
Key takeaway
TCI and self-insured limits are not permanently competing choices; many organisations use both, insuring their largest exposures while self-managing smaller limits. What they share is a need for rigorous documentation, consistent application of credit policy, and evidence that every limit decision was supported by adequate due diligence. The platform that supports your credit workflow needs to make that documentation automatic, not an afterthought.
