6 Reasons You Need Export Trade Credit Insurance
In 2023, export credit agencies provided tools to help make $191.5 billion in international deals safer and more feasible for businesses worldwide, according to the International Chamber of Commerce. They are necessary due to the risky nature of engaging with global markets and the potential for significant losses when something goes wrong. How do they do this, and what can they offer in the form of export trade credit insurance and financial risk solutions to increase your likelihood of success?
The following six reasons explain how this form of insurance safeguards and other risk management services for every step you take into a new market. Learn how to protect your business from the unpredictable nature of international trade and discover how to start embracing cross-border opportunities more confidently.
1. Mitigating Non-Payment Risk
Export trade credit insurance offers a significant safety net for businesses who are worrying about risks related to buyers failing to pay, whether that is due to:
- Unexpected market conditions
- Financial hardship
- Buyer insolvency
- Global upheaval
- Currency fluctuations
- Import/export restrictions
It is so beneficial that over $7 trillion in shipments were insured in this way during 2022, according to the International Credit Insurance & Surety Association.
The coverage can shield businesses from significant financial losses, which could lead to larger issues. They can then focus on growth rather than mitigating payment risks.
This benefit is imperative when it can be challenging to verify the reliability of buyers. Additionally, insurers can often provide business credit analyses for potential buyers. This analysis can give you even more assurance of a company's ability to pay.
Export trade credit insurance can even help with extremely high-value invoices that would otherwise cause the company significant financial problems if unpaid. The coverage also gives a company time to pursue the payment through legal means or to find other buyers for inventory should the contract become void, preventing waste.
2. Enhancing Access to Financing
With trade credit insurance, a company can inform a bank that they are more secure financially. Thus, they can inform a lender that their receivables are guaranteed regardless of the final situation.
An insured receivable is a much lower-risk asset than one that has the potential not to be paid. As such, a business can then seek a higher borrowing capacity and use the money to boost the company's capabilities. It also allows the company to negotiate better financing terms, such as:
- Larger lines of credit
- Reduced interest rates
- Extended repayment periods
- Reduced collateral requirements
- Preferential credit score assessments
After becoming insured, the receivables are also much more creditworthy. This reliability can help businesses secure more capital from other sources as it shows stable cash flow and reduced risk. Shareholders and investors may then be a good source of additional investment, offering more benefits for a business.
3. Extending Competitive Credit Terms
As mentioned above, having trade credit insurance can allow businesses to seek more attractive credit terms. For example, they can offer open account terms in any business deal rather than requiring advanced payment or on delivery.
An open account offering is much more appealing to buyers who can have a lot more flexibility in making their payment, meaning there is more security on both sides. It can also build trust between different businesses, fostering long-term relationships.
The business may also find more market demand for their product after exporting for some time, and individual companies may want to order larger quantities. Export trade credit insurance can allow a company to accept such a large order, knowing that non-payment is covered. Such risky business deals would otherwise be a larger gamble and cause significant issues for a company if things go wrong.
4. Stabilizing Cash Flow
When exporting, trade credit insurance can prevent peaks and troughs in payment from becoming significant enough to concern the business. If receivables are covered, even if a buyer defaults, there will not be concerns over sudden income loss. As such, the company can start to make better long-term financial plans, knowing that they will not have worries about non-payment.
Such guarantees mean businesses can sign contracts to supply inventory or cover other expenses. A cash flow disruption will not cause issues with payments they can make, allowing for more lucrative investments.
5. Supporting Growth in New Markets
When entering new international markets, a company might not always be sure of the reliability of buyers.
With export trade credit insurance and global trade support from an insurer, an exporter can explore these new regions with more confidence. Non-payment will not cause problems for them, as the insurance offers a safety net and allows the business to build relationships without needing to be as wary or defensive. Doing this can show a foreign company that a business is serious and can even extend a level of trust they would not otherwise be able to.
This assuredness can also encourage growth in the new market, building up that region over time and allowing for further opportunities.
6. Supporting Customer Relationship Management
A company with export trade credit insurance can offer more favorable credit terms to its foreign business customers. Doing this can build up a client's loyalty to that company, making it less likely they will pivot to a different business relationship instead.
Customers and clients will feel more valued, as they will not always need to make payments up-front. They may also think that the supplying business has also committed to them due to having more positive contract terms. Over time, this ensures a relationship with a company client will likely be more positive.
Securing Your Growth with Export Trade Credit Insurance
Leveraging export trade credit insurance allows a company like yourself to quickly tap into new markets. You can know that your business has additional protection and take extra risks, knowing that the insurance can protect you should things not go as you expect.
If you need to know more before committing, ARI Global can help you understand what this insurance can offer you as a business. We can work with you to tailor an insurance policy to your needs. Contact us for a quote to learn more and discover how it can transform your strategy surrounding foreign exports.