- This insurance typically covers non-payment for commercial factors due to political risks and natural disasters
- Export credit insurance enables businessmen to operate with more confidence in international markets
SMEs exporting products or services are often faced with the risk of non-paying customers. This situation can be solved by taking out “export credit insurance” that minimizes this risk without missing out on valuable business opportunities.
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:
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:
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