Exporting can be risky, but trade credit insurance helps protect your business from unpaid invoices and buyer defaults. Here’s how it works:
- What It Does: Trade credit insurance protects your business from non-payment due to buyer insolvency, payment delays, political unrest, or economic instability.
- Why It’s Important: Non-payment contributes to 25% of corporate bankruptcies in the U.S., and late payments are a common issue in global trade.
- Key Benefits:
- Covers up to 90-100% of losses from unpaid invoices.
- Protects against both commercial (e.g., buyer bankruptcy) and political risks (e.g., war, sanctions).
- Improves cash flow and financial stability.
- Allows you to offer more competitive payment terms like open accounts.
- Cost: Typically under 1% of insured sales, making it a cost-effective way to reduce financial risks.
This coverage not only safeguards your finances but also gives you the confidence to expand into new markets and grow your business globally.
Credit Insurance as a Risk Mitigation Tool for International Trade
Export Risks That U.S. Businesses Face
Exporting opens doors to global markets, but it also comes with challenges that don’t arise in domestic operations. Understanding these risks is crucial for businesses aiming to succeed internationally.
Commercial Risks in Exporting
One of the most pressing concerns is the risk of buyer insolvency or payment defaults, which can directly impact a company’s financial health. For example, foreign customers experiencing financial trouble might delay payments for months. To make matters worse, limited credit data in international markets makes it harder to assess a buyer’s financial stability. Consider this: within the USMCA region, late payments affected 47% of the total value of all B2B credit sales. In the U.S. alone, this figure climbed to 50%, with businesses writing off 8% of invoices as uncollectable.
The situation has grown more challenging over time. By 2023, the average days sales outstanding (DSO) reached 59 days, and one in five companies reported waiting over 90 days for payment on typical invoices.
Currency exchange fluctuations add another layer of financial uncertainty. If contracts aren’t in U.S. dollars, exporters risk receiving less money than expected due to unfavorable exchange rate shifts. Additionally, disputes over product quality can delay payments, further tightening cash flow.
Logistics and transportation risks also loom large. International shipments face longer transit times, more handling points, and varying infrastructure quality, increasing the chances of damage, delays, loss, or theft. These logistical hurdles often compound the financial challenges exporters face.
Political and Economic Risks
Beyond the financial and logistical issues, political and economic factors in foreign markets can significantly disrupt export activities.
Political instability is a major concern. Events like government interference, war, civil unrest, terrorist attacks, sanctions, and embargoes can abruptly halt business operations. The scale of these risks has grown in recent years. For instance, trade restrictions have more than tripled since 2019, and the geopolitical risk index spiked following Russia’s invasion of Ukraine in 2022.
"After more than 70 years of peace, political risk has been back in the forefront, in various forms, and has punctuated the agenda of many countries in recent years. These risks are clearly on the increase, notably due to the reshaping of the world order and the climate emergency, two major sources of uncertainty and instability for the years to come."
- Ruben NIZARD, North America Economist and Head of Political Risk at Coface.
Economic volatility in foreign markets adds to the complexity. Factors like currency devaluation and inflation can quickly turn a profitable deal into a financial loss. For instance, if a buyer’s local currency weakens significantly against the dollar, they may struggle to meet payment obligations or default entirely.
Geopolitical tensions are also reshaping global trade patterns. Between 2017 and 2023, China’s share of U.S. imports dropped by 8 percentage points, while the U.S. share of China’s exports declined by 4 percentage points. Following Russia’s invasion of Ukraine, trade and foreign direct investment between geopolitical blocs decreased by 12% and 20%, respectively, compared to flows within those blocs.
Legal and regulatory challenges further complicate exporting. Differences in customs laws, contracts, currency regulations, and intellectual property rights can limit an exporter’s ability to resolve disputes. Additionally, cultural and language barriers can lead to misunderstandings that might escalate into conflicts.
The cumulative effect of these issues is striking. The failure rate for international expansions is estimated to range between 70% and 90%. Financial pressures are mounting, with working capital requirements rising for the third consecutive year, hitting 76 days of turnover by Q4 2023. Alarmingly, a third of companies now report exceeding 90 days for working capital needs. This, combined with predictions of an 11% rise in global business insolvencies in 2024, underscores the growing financial strain on exporters navigating these increasingly complex risks.
How Trade Credit Insurance Protects Exporters
Trade credit insurance plays a key role in managing the risks of international trade, giving U.S. businesses the confidence to expand into global markets. By shifting the financial risk of non-payment from exporters to insurers, companies can focus on growth without the constant worry of unpaid invoices.
Coverage for Non-Payment and Insolvency
One of the standout features of trade credit insurance is its protection against buyer defaults and financial troubles. If a foreign customer goes bankrupt, becomes insolvent, or delays payment for an extended period, insured exporters can recover up to 90–100% of the invoice value. This safeguard is critical for maintaining healthy cash flow, especially since buyer defaults or insolvencies contribute to 25% of corporate bankruptcies.
Export credit insurance addresses various commercial risks, including insolvency, bankruptcy, and payment delays, ensuring exporters aren’t left to shoulder the financial burden when customers face difficulties. For example, a U.S.-based pharmaceutical company successfully distributed millions of test kits to a foreign government entity, relying on credit insurance to manage potential payment risks.
Reducing Risks in International Trade
International trade brings challenges that domestic business rarely encounters. Trade credit insurance helps exporters navigate these complexities by covering not just commercial risks but also political risks. These include situations like wars, terrorism, riots, revolutions, currency inconvertibility, expropriation, and sudden changes in import/export regulations. For instance, restrictive local debt recovery laws or currency controls that complicate payment transfers are less intimidating with this type of coverage.
The scale of trade credit insurance underscores its importance. In 2022, over $7 trillion in shipments were insured, and in 2023, export credit agencies supported $191.5 billion in international transactions, providing a layer of security to exporters. This level of protection helps businesses not only secure their transactions but also improve their overall financial management.
Improving Business Confidence and Cash Flow
Trade credit insurance does more than just mitigate risks – it also boosts business confidence. By enabling exporters to offer competitive open account terms, it strengthens relationships with international buyers. Additionally, insured foreign accounts receivable are seen as lower-risk assets, which can improve borrowing capacity and lead to better financing terms.
In cases where bad debt occurs, insurers provide prompt compensation, helping exporters maintain steady working capital. This predictability is invaluable for financial planning and investment, particularly when cash flow challenges are common. For example, nearly 52% of SMEs in the UK have reported late payments due to cash flow issues.
For exporters seeking tailored solutions, companies like Accounts Receivable Insurance offer customized trade credit insurance policies with dedicated broker support. These services help businesses navigate the complexities of global trade, ensuring they’re well-protected as they grow internationally.
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Choosing the Right Trade Credit Insurance Policy
Selecting the right trade credit insurance policy is a key step in protecting your growing export business. Research shows that about 40% of a company’s assets can be tied up in unpaid invoices, and payment defaults are responsible for 25% of corporate bankruptcies. Making a well-informed decision can help safeguard your operations and ensure smoother growth.
Determining Coverage Needs
Start by identifying the specific risks your business faces. These could include commercial risks like insolvency, bankruptcy, or prolonged payment delays, as well as political risks such as war, terrorism, or currency fluctuations. Analyze the creditworthiness of your customers and assess the stability of the markets you’re operating in.
Your choice of coverage should align with your export portfolio. For companies operating across diverse markets, a multi-buyer policy might be the better option, typically costing less than 1% of insured sales. On the other hand, if your risks are concentrated with a few key buyers, a single-buyer policy could be more appropriate.
It’s also essential to evaluate your cash flow and profit margins. Think about how much loss your business could handle without jeopardizing operations. Most trade credit insurance policies cover 90% to 95% of invoice values for both commercial and political risks, while medium-term policies usually cover around 85% of the net contract value.
Act early to secure coverage and mitigate potential risks.
Comparing Insurers and Policy Features
When reviewing insurers, consider key factors like the scope of coverage, policy limits, premium rates, and the insurer’s reputation for handling claims. A smooth claims process can make all the difference in maintaining steady cash flow during challenging times.
U.S. exporters should consider working with a specialized broker to navigate the complexities of trade credit insurance. Decide whether you need international coverage, protection for a single customer, or whole turnover insurance. Ensure the policy addresses all non-payment scenarios, including insolvency, political risks, and regulatory changes. Some insurers may offer more flexible credit limits, while others may have stricter underwriting requirements.
For a more personalized approach, Accounts Receivable Insurance provides tailored policies and broker support to align coverage with your specific risk profile.
Additionally, third-party review sites can give you insights into an insurer’s service quality and how they handle claims. This can help you choose a provider that meets your expectations.
Finally, take the time to closely examine the policy details and associated costs before making your decision.
Policy Terms and Costs
The cost of trade credit insurance goes beyond just premiums. Premium rates typically range from 0.05% to 0.6% of insured sales, with 0.2% being a common benchmark. For a business generating $20 million in revenue, premiums often stay under $50,000.
Several factors influence premium rates, including your industry, financial history, customer creditworthiness, and the economic conditions in the markets where you operate. Experienced exporters with a strong track record may even qualify for lower premiums.
Carefully review policy exclusions to avoid unexpected gaps in coverage. Pay attention to deductibles, coverage limits, and additional fees for services like credit limit assessments, policy administration, or debt collection support.
To make an informed decision, obtain multiple quotes and compare not just the costs but also the breadth of coverage and the insurer’s responsiveness. Keep in mind that the cheapest policy may not always provide the best value if it lacks critical coverage or effective claims support. The right policy should offer the flexibility you need to grow in new markets and expand your customer base effectively.
Building Stronger Export Strategies with Trade Credit Insurance
Trade credit insurance gives U.S. exporters a solid foundation to grow their businesses while ensuring secure financing. In 2022 alone, more than $7 trillion in shipments were backed by trade credit insurance, underscoring how companies globally are using this tool to strengthen their export operations.
This type of coverage doesn’t just reduce financial risks – it also opens doors to new opportunities. By insuring receivables, businesses can improve their borrowing capacity and free up working capital to fuel expansion efforts.
One of the biggest advantages? It enhances your competitive edge. Offering open account terms to international buyers becomes much less risky when you’re protected against non-payment. This flexibility can often be the deciding factor in securing new business deals.
"Trade credit insurance allows you to take on additional work safely and securely, whether it’s a new customer or expansion from existing customers", says David Edgell, Regional Commercial Manager at Allianz Trade.
The benefits are clear when you look at real-world examples. A UK-based chemicals company with an £18 million turnover secured a lucrative South American order worth £7 million annually by offering open credit terms. After Allianz Trade approved trade credit insurance for the buyer, the company’s turnover jumped by nearly 40%.
Expanding into new markets is also less daunting with coverage that protects against both commercial risks, like buyer insolvency, and political risks, such as war or terrorism. Policies typically cover 90% to 95% of losses from these types of risks.
Additionally, cash flow becomes more predictable. With 25% of corporate bankruptcies stemming from payment defaults, having trade credit insurance means you’re less likely to face bad debt or prolonged collection efforts. Instead, you can channel your energy into exploring new markets and building stronger customer relationships.
For tailored solutions that align with your export strategy, consider working with Accounts Receivable Insurance. Their expertise helps businesses navigate the complexities of international trade while maintaining the flexibility needed to grow quickly.
Integrating trade credit insurance into your export strategy early on can shield your business from losses, strengthen customer trust, and give you a competitive edge in global markets.
FAQs
How does trade credit insurance protect exporters from political and economic risks in global trade?
Trade credit insurance provides exporters with a safety net against political and economic risks, offering coverage for non-payment situations caused by events such as government actions, civil unrest, or war. This type of protection allows businesses to confidently extend credit to international buyers, knowing they’ll be reimbursed if a buyer fails to pay due to these external challenges.
Beyond safeguarding payments, trade credit insurance also assesses the creditworthiness of potential buyers. This helps businesses make informed choices when exploring new markets. Additionally, it protects exporters from risks like currency restrictions or abrupt changes in trade regulations, ensuring steadier cash flow and greater financial security in global operations.
What should businesses look for when choosing a trade credit insurance policy to protect their exports?
When choosing a trade credit insurance policy for export operations, it’s important to focus on a few critical factors to ensure the policy aligns with your business needs.
Start by assessing your risk exposure. This includes examining the markets you operate in, the credit terms you extend to customers, and the diversity of your client base. A clear understanding of these risks will help you select a policy that provides the right level of protection. Also, decide on the type of coverage that fits your trade model – whether it’s a whole turnover policy for comprehensive coverage or a single-buyer policy that targets specific accounts.
It’s also essential to evaluate the insurer’s expertise and global presence. A provider with deep market knowledge and international experience can be an invaluable resource, especially when dealing with the complexities of global trade. Lastly, compare the cost of the policy to the potential benefits. Look for a balance that offers solid protection against financial losses while delivering good value for your investment. By taking these steps, you can secure a policy tailored to your export operations.
How can trade credit insurance help businesses offer more competitive payment terms?
Trade credit insurance provides businesses with the confidence to offer more flexible payment terms while protecting against the risk of non-payment. By having this coverage in place, companies can extend longer credit periods to their customers without jeopardizing their cash flow. This flexibility not only helps attract new clients but also strengthens existing relationships, giving businesses an advantage in a competitive market.
Beyond improving payment terms, trade credit insurance safeguards financial stability by covering losses from non-payment caused by customer bankruptcy, defaults, or even political events. With this safety net, businesses can focus on pursuing growth opportunities while keeping their operations steady and reducing financial uncertainty.
