Export Credit Insurance
In the days of digital communications and growing international commerce, export credit insurance is becoming a necessity for more and more business owners. Many companies now do business directly with international customers and clients, but with each new customer comes new jurisdictions, laws, and most importantly, more accounts receivable, and more responsibility.
Export credit insurance is designed to bridge the gap in international commerce and provide a safety net for businesses with international operations to protect their assets from a number of new, and foreign risks. Somewhere in the growth phase business owners eventually begin offering their goods or services on credit, and in due time, many of these businesses begin to extend their arms internationally.
What it Covers
Export credit insurance covers a number of financial perils including bankruptcy, foreign currency price volatility, cash shortage, or in some cases, export credit insurance covers the risk of both fraud and theft. All told, export credit insurance can cover virtually every risk of international commerce.
The scope for such a policy isn't always centered around what is immediately financial related. Export credit insurance can cover losses as a result of natural disasters or political risks including war, strikes, riots, and other civil unrest. Embargoes, new trade policies or tariffs or newly formed regulations are also commonly a named peril on an export credit insurance policy.
What it Costs
Export credit insurance companies understand that the overwhelming majority of transactions work out for both parties, and only rarely do excessive losses result from political or natural disasters. Thus, the cost for export credit insurance is usually only a fraction of a percentage point for each transaction, with costs dropping for each incremental uptick in sales volume.
Most commonly, export credit insurance is sold as an insurance product against a number of listed parties. The insurance company, after reviewing the business and creditworthiness of each of your customers, determines a percentage premium fee that is to be paid on the transactions with each customer. Insurance companies almost always require that businesses be able to cap the line of credit offered to their customers, and that no risks are taken over and beyond the policy limits.
Also, policy holders are often asked to report their credit or trade lines to a proper reporting agency, just as a consumer lender would report a credit card on a personal credit report. This process, insurance companies have found, greatly reduces the risk of dealing with companies engaged in fraud and acts as a deterrent to those who might consider underpaying their accounts payable (your company's receivables.)
Why Own Export Credit Insurance
Besides the obvious benefit of insurance against nonpayment or other business risk, export credit insurance offers a number of benefits.
For one, accounts receivables that are insured against counter-party risk by a reliable, well-known insurance company are more easily turned into cash. This opens the door for less expensive leverage against your accounts receivable, and the possibility of issuing commercial paper on immediate receivables.
Insured receivables, at least to lenders, are as good as cash. Thus, a small export credit insurance premium is often displaced by the ability to leverage the companies assets, and improve internal return on cash, return on equity, and return on cash. Your bad debt reserves can be reduced, and invested directly in your business, rather than sheltered on the sideline.
Finally, export credit insurance allows a business to extend greater lines of credit to their international customers, expand into new markets where the political and economic risks may be heightened, and for businesses that work mostly with only a few clients, remove their own solvency risks should a single client enter bankruptcy.