The Benefits of Credit InsuranceOctober 05, 2015
Jenny L. Norris
Meridian Finance Group
The U.S. economy has not always been on the cutting edge of exports. Our trading history is much younger than that of our European forebears. Over hundreds of years, trade between European countries grew quickly because of the close proximity. However, European exporters were faced with currency differences, as well as numerous legal frameworks when selling outside their country. Trade finance and other credit instruments slowly evolved in these markets, primarily out of Germany and France. Credit insurance is a prime example of a trade instrument that developed in Europe more recently (over the past 20 years) and is becoming much more active here in the U.S.
As international trade grows, U.S. exporters are learning that cash in advance and letters of credit are no longer competitive payment terms in the global marketplace. In order to compete with foreign competitors in a worldwide economy involving sellers from many countries, more and more U.S. exporters are being asked to extend open-account credit to their overseas customers.
Extending terms to overseas buyers inherently comes with risks that U.S. companies may find daunting. How does one make a decision about how much credit to extend? Are there local laws to protect you as a creditor? How do you collect? These questions are not only brought up by exporters, but often times the manufacturer’s own lender may question the decision of its client to extend terms in foreign markets, especially if that lender considers receivables in its borrowing base formula.
Credit insurance offers companies a way to insure one of their largest and most exposed assets, - their receivables. A company may choose to cover just its foreign receivables, just its domestic portfolio, both domestic and foreign, and in some cases named buyers or single-buyer policy may make sense. When it comes to covering receivables, the more debtors in your portfolio for an insurer to consider the better the spread of risk and the lower the premium may be.
Business owners, credit managers and salespeople all make critical decisions when considering open account terms for their customers. Credit reports, trade references and prior ledger history are all tools in making a credit decision, but the burden of collections still falls on the company extending terms. Having a credit insurer that is pooling information from a wide range of sources and willing to insure its decision to cover a receivable, give companies that “I can sleep at night” comfort. Lenders and/or companies may be uncomfortable with sales concentrations and credit insurance can help ease that worry.
Beyond risk mitigation and enhancing a credit department, credit insurance also has other benefits. As a sales tool, credit insurance supports business development efforts. Companies use credit insurance to compete against other companies that offer terms, expand business to new customers or support their distributors by allowing them extended terms to stock inventory locally. As a financing tool, companies may assign their insured receivables to their bank to allow for receivables that would otherwise be excluded to be included as collateral, or to request a greater percentage of receivables to be counted towards a borrowing base.
Companies have choices when it comes to working with credit insurers by choosing either private-sector insurance companies or government-backed programs. Each has its own advantages and disadvantages. While the government-backed program, Ex-Im Bank (which stands for the Export Import Bank of the United States) has no minimums, it is strictly governed by supporting only U.S. exports of products and services with a 51% or higher U.S. content. Private-sector credit insurance, while agnostic to country of origin and U.S. content requirements, does require minimum premiums (which are typically not a problem for established exporters but may pose challenges for small/new exporters).
Overall, credit insurance is relatively inexpensive typically costing a fraction of a percent of insured sales/invoice values. When deciding what kind of policy to purchase, and from which insurer, what exporters want to pay special attention to are considerations like individual buyer credit limits, and/or, discretionary credit limits, cancellability or non-cancellability of buyer/country limits and a policy’s aggregate limit of liability. These are all parameters your insurance broker, ideally a broker specializing in trade credit insurance, can help customize for your specific business needs.
Jenny Norris is Regional Manager for Meridian Finance Group, based in Glastonbury, CT. Meridian specializes in both domestic and international trade credit insurance, and in 2014 was awarded the President’s “E” award for making significant contributions to US exports and international trade. As a broker, Meridian works with every insurance company and government agency that underwrites credit insurance, allowing Meridian to provide clients a range of options and structures to support their specific needs. If you would like further information on credit insurance, Jenny can be reached at firstname.lastname@example.org. For more information regarding Meridian go to www.meridianfinance.com.