Mitigating Overseas Trade Risk

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MITIGATING OVERSEAS TRADE RISK WITH EXPORT CREDIT INSURANCE

Companies that want to expand their sales markets would do well to look overseas. Exporting continues to be one of the primary engines that is driving the U.S. economy. However, a company needs to have done its homework before making this leap; specifically, researching which markets hold potential for its products and services. There are countless horror stories of companies failing to make the transition to the international arena, but there are just as many success stories. Once these new markets have been identified, a company needs to develop a sales plan. Cash in advance is great, but may be unrealistic in a competitive environment. Letters of credit can be an option, but there are instances when granting credit terms will be a necessity. How do you do that without losing your shirt?

Export credit insurance is a tool to assist exporters in mitigating the risk of selling overseas. The typical export credit insurance policy insures the exporter’s foreign receivables against political and commercial loss. Political losses can be caused by war, revolution, cancellation of an existing policyholder’s export or buyer’s import license, or currency inconvertibility. Commercial losses are those that affect business anywhere, such as a buyer’s insolvency or failure to pay an obligation within 90 days after the due date, including a failure to pay because of a currency devaluation. Commercial disputes are not covered under these policies.

There are a number of providers of export credit insurance. The Export Import Bank of the United States (Ex-Im Bank), a U.S. government agency, offers a wide range of insurance policies to accommodate many different export credit needs. There are policies specifically designed for small business exporters as well as multi-buyer policies and single-buyer policies. They also insure services and leases. Ex-Im Bank does require that the products being sold must be produced or manufactured in the U.S. There are also some country limitations (i.e. Marxist-Leninist countries) as well as a restriction on sales for foreign military use.

There are also a number of private insurance companies providing export credit insurance in the U.S. These policies will also cover political and commercial risk; however, they do not require the U.S. content in the product that is being exported.

In general, policies cover 90 percent of the commercial risk and 90 to 100 percent of specified political risks. In addition to retaining a percentage of the risk on each transaction, the exporter may be required to absorb a first dollar loss, called the deductible, on losses that relate to transactions insured under a given policy.

In addition to mitigating the risk of selling overseas, a company with an insurance policy will often find that its bank will be willing to include insured receivables in a borrowing base. Therefore, a company with export credit insurance will find itself with a competitive edge when seeking financing.

The cost of export credit insurance varies based on a number of factors: the countries where the buyers are located, the terms being offered, whether both political and commercial coverage is requested, and the size deductible the exporter is willing to absorb. Policies have a minimum annual premium ranging from $500 to $10,000.

Even with the current economic problems in Asia and the concerns about Latin America, exporters should still consider selling in these markets, however cautiously. By combining export credit insurance with prudent selling terms to creditworthy buyers, exporters can continue to sell to existing customers and possibly expand market share by offering terms to new customers. For example, Ex-Im Bank is continuing to offer insurance coverage in South Korea. An indicative rate for coverage on a 60 day open account sale to a company in the private sector would be just under one percent of the invoice amount.

The easiest way to determine which insurance policy is right for your company is to enlist the help of an insurance broker who specializes in export credit insurance. These brokers will be able to obtain quotes from a number of insurance companies. Contact your international banker or local international trade association for a list of brokers in your area. Ex-Im Bank’s Web site (www.exim.gov) also includes a list of brokers and its most current country limitation schedule and exposure fees.

Peter Knudson is senior vice president/general manager of Imperial Bank’s International Banking Division.

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