The use of Trade Credit Insurance is growing rapidly in the USA and around the world as credit executives learn to use this most beneficial product to reduce the risks related to both domestic and export sales. Less efficient and more costly credit methods, specifically letters of credit, continue to play a lesser role in global markets.
Prudent executives use Trade Credit Insurance as a strategic management tool that protects their businesses from commercial credit losses that result from a domestic or export client’s bankruptcy or payment default. In international transactions political unrest or abrupt changes in import or trade regulations are a very real menace that a trade credit policy can cover.
Today, businesses can use trade credit insurance to reduce concentration risk in their receivables portfolio, obtain better financing terms from their lender, and enhance their credit management process. Having protection from buyer risk helps policyholders compete more effectively for new business and to retain existing customers. It provides a competitive advantage through extended open terms, aggressive credit limits and expansion into new markets.
Industry consolidations in many key sectors have forced some businesses to accept significant financial risks such that they are unable to set sufficient bad-debt reserves to cover a major default. Lenders and stockholders also get nervous about high concentrations of risk in a few accounts. Proactive credit professionals use commercial credit insurance as a cost-effective remedy.
Financing export sales is easier when the accounts receivable are insured. Most banks will not lend against foreign receivables because they are not able to easily evaluate the credit risk and are less able to collect those export receivables if need be. Competition forces exporters to sell on open account terms, so if they are unable to finance those sales, it creates pressure on the cash position of the company. Exporters can get into the position of having large amounts of working capital tied up in foreign receivables and not be able to borrow against them.
Thankfully, many banks now recommend that their clients purchase credit insurance on their international receivables. With the accounts insured, the banks can finance those receivables that they would not otherwise be able to do. If that same business sells its insured receivables, it can take them off the books, and greatly free up cash flow.
The businesses that insure their foreign receivables can also enjoy a number of important competitive advantages. Having the protection of the insurance company allows them to expand more aggressively than their uninsured competitors into export markets that would otherwise be difficult to enter. Offering creditworthy buyers open account terms is great benefit for the buyer, putting the insured vendor into “Favorite Vendor” status because of the time and expense savings provided to the buyer. The buyer does not have to tie up its bank line of credit and pay the expenses related to the issuance of letters of credit or other secured forms of payment. It is much easier for everyone to use open account terms.
The same thing is true with domestic sales. Prudent executives are using their insured domestic receivables also to provide their lenders with better collateral and thereby obtain better financing options and expanded credit lines. Once insured, the receivables become an investment grade asset that enables the bank to increase advance rates and improve terms.
Strengthening credit management procedures is another benefit of working with a large credit insurance company. As a business expands, the management team is put into the position of signing off on large credit limits. Many times, those executives have other talents and are not fully prepared to make credit decisions. Even senior credit executives sometimes get uncomfortable authorizing very large limits when information is scarce. The credit insurance companies help strengthen credit management procedures by conducting thorough risk assessments of each buyer and providing an expert, third party opinion. This aids the executives involved to feel more confident about authorizing large credit limits or credit limits for other buyers in other countries.
Demand for trade credit insurance is growing rapidly in the U.S. as business leaders and credit executives learn of its advantages. Today’s policies offer advances in underwriting, terms and pricing that offer clear competitive advantages.