As the United States emerges from the worst recession since the Great Depression, trade financing is not only a vital part of the export process, but also an extremely important one to the economy. In addition, export financing can be used as a tool to boost competitiveness.

The ability to offer foreign customers attractive payment terms can provide the necessary edge to sell more goods and services worldwide. But in doing so, it’s essential to accurately weigh the risks. And in today's volatile environment, the risks are high.

Allowing a foreign buyer to pay on open account, for example, could very well win new business. But if the importer doesn't pay, the impact on the seller could mean the difference between business success and failure. Consequently, it's essential to manage the risk inherent to foreign receivables.

Export Credit Insurance

Today, American exporters and those worldwide are feeling the effects of a tightened credit environment. And due to heightened risks, increasing numbers of exporters are requesting letters of credit and obtaining credit insurance.

Export credit insurance programs enable companies to lower risks of non-payment and, as a byproduct, facilitate financing of export activities. This is especially beneficial in this volatile economic environment, as well as in emerging markets where liquidity is tight. And export insurance can assist in competing with aggressive sales terms offered by rivals, too.

Integrating financing within a sales deal is a benefit afforded by having export credit insurance. It can improve a company’s cash flow by increasing its borrowing base. When foreign receivables are properly insured, they are viewed similarly to domestic receivables. Some banks will even purchase insured receivables, thereby allowing exporters to recognize them as cash on their books without any commensurate debt.

Currently, risks extend well beyond those precipitated by the financial crisis. From payment default, foreign exchange controls and political instability, to piracy and risks posed by natural disasters, export credit insurance can help ensure exporters get paid and sell more goods worldwide.

Public vs. Private Insurance

To mitigate various types of risk, new exporters often turn to the Export Import Bank of the United States (Ex-Im), the official U.S. export credit agency. Ex-Im is active in approximately 90 countries worldwide. Its policies offer high levels of coverage with relatively low minimum annual premiums, but they do require the product being sold to be comprised of at least 51 percent U.S. content. This includes American labor but excludes the mark-up. Ex-Im will not cover sales of certain defense-related items. Active exporters, particularly those whose products may have less than 51 percent U.S. content and and involve military goods, will find private insurance companies offer insurance programs with greater flexibility.

Three types of export credit insurance policies are briefly explained below. All such policies insure receivables against nonpayment by foreign buyers, allow the exporter to extend credit to foreign customers, and facilitate financing from the exporter’s lenders. Risks covered include insolvency, bankruptcy and slow payment on the part of the buyer, as well as losses due to political events like war, revolution, cancellation of an import or export license, or currency inconvertibility. Terms offered may be as long as 180 days or even one year, yet with minimal cash-flow and balance-sheet impact when the insurance is designed to facilitate financing from the exporter’s bank.

Ex-Im's Small Business Export Credit Insurance

Geared to companies new to exporting, a small-business policy from Ex-Im Bank covers losses at 95 percent of the invoice value. To issue such a policy, Ex-Im Bank assesses a one-time, refundable advance premium of $500, applicable towards transactions insured.

Multi-Buyer Export Credit Insurance

Multi-buyer insurance is available both from Ex-Im and private insurers. Such a policy enables an exporter to reduce the risk of a pool of buyers by insuring all of the exporter’s foreign accounts receivable against non-payment due to commercial reasons and political events. Ex-Im policies pay 95 percent of the invoiced amount, with heightened coverage for approved agricultural commodities, at a 98 percent limit, and for sales to sovereign buyers, at 100 percent. Private insurance generally covers 90 percent of losses, though a policy may be structured with 100 percent coverage above an annual deductible.

Premium rates are based on several factors, including length of terms offered, types of buyers, and country risk. Policies are available from Exim with a one-time, refundable advance premium of $500. Policies from private insurers usually have a nonrefundable, minimum annual premium of $5,000 to $10,000, but are likely to carry a lower premium rate and therefore be less expensive to companies with a large volume of export sales.

For an additional premium, exporters also can often arrange pre-shipment coverage—which is useful for special orders or where there may be a long manufacturing run before shipment—for an additional premium.

Multi-buyer policies require a “spread of risk,” meaning they must include sales to several buyers with no one buyer dominating the pool. Exporters selling to only one or two buyers should not despair, however, as single-buyer insurance is also available.

Single-Buyer Export Credit Insurance

Exporters utilizing single-buyer policies can make a single or multiple shipments to individually-insured buyers. Generally, the maximum payment terms that an insurer will cover are one year, but medium-term insurance is available for various capital goods. Both Ex-Im and private companies offer such policies, with similar differences to those described above.

Domestic Credit Insurance

A particular limitation that Ex-Im Bank has is that they are constrained to insuring goods that are exported from the United States. Private insurers can cover domestic sales as well.

Additional benefits offered by private insurers' multi-buyer policies sometimes include lower interest rates and higher advance rates for companies that use their receivables as collateral for loans. Private insurers' Single-buyer policies also can be used to cover “over-concentrations” that cause receivables from large buyers to be excluded from a borrowing base and simply sell such receivables to their trade finance bankers.

The Next Step

When it comes to finding the appropriate insurance policy, new exporters will find Ex-Im Bank a valuable resource and experienced exporters will find that various private insurers offer attractive policies. In the end, it's important not to let profitable international deals slip away if the risk of not getting paid is an issue. It often is said that credit insurance pays for itself in increased sales and reduced financing costs, even before considering the losses it may cover.

Fifth Third Bank has considerable experience and expertise with export credit insurance, and is ready and willing to work with exporters to identify the best policy for each circumstance. Plus, we'll ensure that the type of coverage obtained lends itself to financing, whether it is loans using receivables as collateral or selling the receivables to the bank.

In the months ahead, economic volatility may or may not continue to impact global business. Nevertheless, credit insurance always will be an attractive option.

This article appeared in International Insights, a publication of Fifth Third Bank, September 2011.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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