If you own a small or medium-sized enterprise (SME) that is just starting out in the export business you may have certain doubts upon closing your initial transactions: Should the customer be trusted? Will he comply with his obligations? Will he pay in good time and in the appropriate manner? 

These are reasonable doubts since exporters are certainly at risk when they start doing business with unknown parties that are located remotely. However, businessmen can anticipate these risks and adopt measures to avoid them without missing out on new opportunities.

An alternative is to take out “export credit insurance” (ECI). According to a Guide prepared by the U.S. government, this policy “protects an exporter of products and services against the risk of non-payment by a foreign buyer. In other words, ECI significantly reduces the payment risks associated with doing business internationally by giving the exporter conditional assurance that payment will be made if the foreign buyer is unable to pay.”

In principle, export credit insurance aims to cover circumstances where the buyer cannot pay the agreed amount. But in general coverage goes beyond this and includes additional guarantees.  

By limiting your risk, you can sell to more international buyers and compete vigorously in international markets 

“There are always various types of risks in international trade”, explains Hideki Funatsu, from Hokkaido University in Japan. “Some of them are inevitably beyond the control of a private company. For example, (…) as some developing countries have fallen into financial trouble in the course of the worldwide recession of the early 1980’s, the fear of non-payment by foreign buyers has grown among companies that export to these markets. Even in the markets of developed countries, looming protectionism creates uncertain circumstances for exporters.” 

Cătălin-Florinel Stănescu and Mircea Laurenţiu Simion, researchers from the University of Craiova in Rumania, explain the four types of risks that are generally covered by ECI policies:

• Commercial risk: occurs when the “deteriorating financial situation of the private buyer makes it unable to comply with the due date or payment amount. The fact that a buyer cannot honor its commitment to the supplier may be caused by accidental causes, triggering reversible or long-term factors. Failure to pay amounts owed may also be the result of bad faith by the buyer.” 
• Catastrophic risk: occurs when “natural disasters or other causes of force majeure such as floods, hurricanes, earthquakes, volcanic eruptions, fires, explosions, etc. render the buyer unable to pay.”
• Political risk: “includes certain events beyond the control and solvency of the buyer that hinder it to honor its obligations toward the external supplier, such as war, revolution, rebellion, civil war, strike, etc.”
• Currency risk: arises when there are changes in the value of the different currencies involved in the purchase that alter the contract terms. 

If any of these situations occur and the exporter has ECI, the insurance company will pay, depending on the previously agreed terms of the policy, between 80% and 95% of the amount owed. Companies offering these financial services will be in charge of collection procedures, both friendly and through litigation; they will also defray 100% of the cost of these actions. 

The United States Ex-Im Bank (the official U.S. export credit agency), provider of these services, explains that ECI has four major advantages:  

• Reduces the risk of non-payment: “This product can replace cash-in-advance, letters of credit, and other documentary sales. By limiting your risk, you can sell to more international buyers and compete vigorously in international markets.” 
• Enables you to extend credit lines to your buyers: this insurance will allow you to provide beneficial credit terms to international buyers. “In today's competitive global marketplace, you may be able to increase sales by providing this "open account" financing feature to buyers for the purchase of your products.”  
• Helps you export to new markets with more confidence: if previously you had certain doubts upon exporting to countries where there is political tension or unstable social and economic conditions, taking out ECI may open up global markets at a low risk. 
• Increases the possibility of access to credit: by taking out this insurance, lenders will most likely offer more financing opportunities for your company, since your business is more secure.