Letters of credits and cash advances are now no longer acceptable when you are talking about the international standard of the marketplace. Due to the fact that financing in one’s own country can be limited, there are a lot of companies who are aiming to buy on credit alone. If you are the company where everyone is buying from, on credit that is, you need protection in case you do not get paid.
This is where credit insurance comes in. It can protect you financially, just like any insurance would, just in case your client suddenly goes bankrupt with so much credit to your business still. Credit insurance does not only protect your company during the bankruptcy of your client, it is also able to protect you against foreign exchange problems and currency devaluation.
If you are worried about the coverage of the insurance, then this article can explain most of it to you. With the insurance, your foreign receivables are protected from mostly all political as well as commercial risks that come with the nonpayment of the export invoices. Political risks include that of foreign exchange control, war, riots, strike, trade sanctions and the like.
As for the commercial risks, it involves receivership, bankruptcy and other types of insolvency of the company. Insolvency can be due to natural disasters, market demand, currency fluctuation and cash flow problems. Through all of these risks, the export credit insurance can protect you.
The cost for the export credit insurance will ultimately depend on your needs and preferences. It will depend on the spread of your buyer, the country risks where you are having your transactions, your track record in the exporting business and the terms you would like to extend. If your foreign receivables are low, normally, only a fraction of one percent that is based on your sales volume will be charged.
Normally, it is the Ex-Im Bank that loans that gives the companies credit so they can buy foreign products on loan. You answer to the interests and fees of the bank in case you cannot pay them back. This is where the export credit insurance comes in handy.