Entrepreneur’s Notebook—Credit Insurance Assists in Changing Export Climate

0

Companies doing business overseas need to be aware of recent changes that can affect the ability of their customers to meet their payment terms, and the credit expectations of their international business partners.

In the past, cash in advance and letters of credit were customary for doing business with companies in other countries, but increasingly, cash in advance and letters of credit are no longer competitive terms in the international marketplace.

Companies in Western Europe and the Pacific Rim, accustomed to purchasing on open account credit terms from their other suppliers, may expect the same consideration from your company. Your customers in Latin America, Asia, Africa and other emerging markets may be facing scarce capital, currency restrictions and high interest rates, making it difficult or impossible to order your products without credit terms.

Your company may need to extend competitive terms in order to grow your international business. However, business owners extending terms without letters of credit may wonder what happens if they don’t get paid. Foreign customers could file for bankruptcy, run into cash-flow problems, suffer from currency devaluations, or fail to pay your company for a variety of other reasons.

When your export business requires you to extend credit overseas, you can protect your company’s foreign receivables against nonpayment losses with an export credit insurance policy.

Export credit insurance is not only a viable means of securing payment. It can also be an effective sales tool to help increase order quantities by allowing your customers to economically stock more of your products, and facilitate distribution agreements with larger stocking requirements.

This will not only transfer inventory-carrying costs to your foreign distributors, it will decrease your company’s carrying, manufacturing and purchasing costs. By enabling overseas customers to increase their order quantities, your company will be able to make larger production runs, which reduces the impact of manufacturing setup costs and allows you to take advantage of discounts when purchasing materials or finished goods from your suppliers.


Effective sales tool

Beyond negotiating larger orders from your existing customers, export credit insurance can also be an effective sales tool for acquiring new overseas customers. Competitive credit terms will motivate existing distributors to keep more of your products on the shelf, thereby increasing visibility and availability in their local markets, generating sales leads for new customers. As export credit insurance allows your company to extend competitive terms to new distributors, you’ll be able to turn these leads into actual sales.

In addition, export credit insurance will allow your company to enter new markets that you previously would have perceived as too risky, and therefore would not have extended credit terms to companies in those markets. Export credit insurance will allow your business to take advantage of opportunities to penetrate and establish market share in the world’s largest emerging economies.

Export credit insurance is also an effective financing tool. It can help your company obtain more favorable financing by including your insured foreign receivables in your borrowing base, making your foreign receivables more attractive to banks and other lenders, and assigning policy proceeds to any bank or lender.

This will help keep your company’s financial position secure despite exposure to unforeseen events, concentrations of foreign credit risks, or changing international market conditions, and will also help reduce your bad debt reserves and facilitate your asset securitizations.

Export credit insurance protects against commercial and/or political risks that can cause defaults. Commercial risks are defined as buyer insolvency or protracted non-payment of your invoices. These problems could occur for many reasons, such as fluctuation in demand, natural disasters, or general economic conditions in your customer’s country. Political risks include war and revolution, as well as currency inconvertibility, expropriation and changes in import or export regulations.


Insurance details to know

Your entire portfolio of foreign receivables can be covered under one multiple-buyer policy, or single-buyer coverage may be available in some cases. Generally speaking, the broader the spread of risk, the lower the cost of the insurance.

Premiums are based on the terms you extend, the spread of buyer and country risks, and your previous export experience. The cost is low, in most cases even less than the fees charged to confirm letters of credit. Whether or not you pass this incremental expense on to your customers, the price of the coverage is insignificant compared to the value of penetrating markets and holding onto market share.

If your company has a background in foreign credit sales, your policy will entrust you to extend terms to most foreign buyers based on your ledger history and your own internal credit analysis. While eligible for the same coverages, less-experienced exporters can apply for individual approval of each customer’s credit limit prior to extending terms.

Following the failure of a covered foreign buyer to pay its credit obligation to your company, you can file an insurance claim and payment will be pursued through international channels. Properly documented claims will be paid within the period of time specified in your policy, even if the recovery effort is still in process.

Export credit insurance policies are available from government agencies and private-sector insurance carriers. Coverages can be designed to meet the requirements of both experienced exporters and companies new to international sales. A specialized export credit insurance broker can custom-design your export credit insurance program and keep it up-to-date as your export business grows.

Used extensively by companies in other countries, export credit insurance is an essential competitive vehicle for U.S. exporters. When cash in advance and letters of credit aren’t feasible or desirable, your company can extend competitive credit terms overseas, and be confident of getting paid, with export credit insurance.

Gary Mendell is president of Meridian Finance Group, a Los Angeles-based company specializing in international credit, financing and insurance. He can be reached at [email protected].

Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.

No posts to display