Extending credit to foreign customers is often required to be able to compete in foreign markets. However, this exposes exporters to the risk of non-payment. Political risks that can cause foreign customers to default include currency inconvertibility (foreign buyers' inability to obtain U.S. dollars), currency devaluation, war, revolution, cancellation of import/export licenses, foreign government action preventing the import of products, and diversion of voyage. Also, foreign companies may become insolvent or bankrupt, have cash-flow problems, or other commercial problems that could cause them to default or just take a very long time to pay. Export credit insurance (also referred to as trade credit insurance) can protect against these risks.
Benefits of Export Credit Insurance:
Export Credit Insurance can help your company:
- Increase foreign sales
- Foreign customers may want you to extend credit.
- Their access to capital may be limited.
- Interest rates in their country may be very high.
- Strengthens relationships with foreign customers
- Get Paid
- Export Credit insurance provides protection against the risk of default, allowing you to safely extend credit to foreign buyers.
- Improve Financial Performance
- When do you recognize income? When the sale is made or when your get paid? Accounting standards allow for income from credit-insured sales to be recognized when the sale is made.
- Credit insurance improves financial performance, improves cash flow, reduces days sales outstanding and reserves for bad debts and improves return on assets.
- Finance foreign sales
- Most banks will not allow foreign accounts receivable as collateral in your borrowing base.
- Insuring foreign accounts receivable makes them eligible to be included in the borrowing base.
- Improve cash flow and liquidity by borrowing against insured foreign accounts receivable.
Policy Types - Policies can be arranged to cover:
- All foreign and domestic buyers (Global Policy)
- All foreign buyers
- Key accounts
- A single buyer
- Top up (Excess of Primary)
- Multi-insurer syndicated
Policy Terms and options:
- No deductible
- Deductible - either per policy year or per claim
- Indemnity (amount covered) - 90% - !00%
- Comprehensive or Political Risk Only Coverage
- Premium charged on covered sales or on coverage limits
- Premium rates are set primarily on payment terms and country of the buyer.
- Rates are normally a fraction of 1% of covered sales.
- Prepaid policies - where premium is charged up front based on estimated sales
- Pay-as-you-go policies - where premium is paid on the prior month's covered sales
Trade Credit Insurers:
- Ex-Im Bank
- Coface North America
- FCIA (Great American Insurance Company)
- HCC Credit Group
- Lloyds of London
- XL Group
- Zurich Insurance Company