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Insolvency vs Protracted Default
When a buyer does not pay on time, exporters are often faced with an important question. Is this a temporary delay, or is the buyer unable to pay?
Understanding the difference between insolvency and protracted default helps exporters respond appropriately.
What is insolvency?
Insolvency occurs when a buyer is legally unable to meet its financial obligations. This may involve bankruptcy, liquidation, or formal restructuring.
In these situations, the likelihood of receiving payment becomes very low.
What is protracted default?
Protracted default refers to a situation where a buyer has not paid within the agreed timeframe, even though they have not formally declared insolvency.
The buyer may still be operating, but payment remains outstanding beyond an acceptable period.
Why does the difference matter?
Understanding whether a situation is insolvent or protracted default helps exporters:
Assess the seriousness of the non-payment
Decide on next steps internally
Set realistic expectations about recovery
A simple example
An exporter sells goods to a buyer on 90-day payment terms. After 120 days, payment has still not been received, but the buyer continues operating.
This situation may be considered a protracted default rather than insolvency, which affects how the issue is handled.
How Etihad Credit Insurance (ECI) helps
Etihad Credit Insurance (ECI) supports exporters by helping them understand different non-payment scenarios and providing structured support when payment issues arise.