Export Credit Insurance: How It Works, Benefits, Costs, and More
It's estimated that this year alone, the United States has exported over $261.1 billion in goods and services. There's no denying that opening up your business or organization to foreign buyers can greatly improve your sales.
Sadly, it also exposes your company to potential threats, like slow payments or, worse, non-payments. So, what's the solution to dealing with these risks? The answer lies in export credit insurance.
This guide will walk you through the basics of how export credit insurance works, as well as the benefits and potential costs. That way, you can decide if it's the right call for your specific business.
What Is Export Credit Insurance and How Does It Work?
Export credit insurance is a specific type of insurance that protects exporters against some of the threats associated with foreign buyers.
Namely, this includes the potential threat of non-payment for goods and services. However, it can also protect against other threats including:
- Protracted defaults
- Slow payments
- Insolvency with the buyer
- Bankruptcy
- Inconvertible currency
- Import/export changes in regulation
- Expropriation
- Problems with the supply chain
- Trade disruptions related to a foreign government
Here's how it usually works. First, once you've confirmed shipment with an international buyer, you'll provide them with your product or service. Then you'll invoice them for this shipment.
You'll then report the details of this shipment to your export trade credit insurance provider while paying a premium for your policy. Most of the time, your international buyer will pay for the goods and services.
However, if they don't (because of some of the reasons listed above), then the export credit insurance companies will pay for the shipment. If you want to learn more about how export credit insurance works, we recommend checking out this resource offered by the International Trade Administration.
What Are the Benefits?
Numerous benefits export credit insurance can provide both businesses and financial executives. Perhaps the most important one is risk reduction. Regardless of the reason, buyer nonpayment has the potential to cause catastrophic losses for businesses engaging in international trade.
Export credit insurance acts as a safeguard from these rare but devastating deals. This type of insurance is also great for improving liquidity and cash flow.
You're more likely as a business to secure financing when your receivables are properly insured. You can also increase your competitiveness in the market. Buyers are more likely to work with businesses that don't require cash in advance.
With this type of insurance, you can offer a more flexible payment structure to fit the needs of foreign buyers. It's also important to note that export credit insurance doesn't just benefit businesses but also lenders.
It helps lenders maximize their revenue while reducing potential risks. Make sure to check out this resource to learn how every party can benefit from export credit insurance.
What Are the Costs?
You will need to pay premiums on your insurance policies. The specific costs associated with these policies will depend on your policy. As such, you should make sure to get quotes from your provider to make sure that it's feasible for your business.
In addition to the premium, there are other costs that you should consider. For starters, rarely do policies include 100% coverage. As such, there is a small percentage that you can still lose in the event of non-payment.
It's also vital that you carefully research the requirements that are listed in your export credit insurance policy. If for some reason, you're non-compliant with this policy, then providers have the right to deny your claim. As such, you must understand the exact terms that surround your policy.
What Type of Coverage Can You Expect?
There are two main types of export credit insurance policies. The first type is a short-term ECI. Short-term export credit insurance will provide between 95% to 90% coverage.
Under this type of policy, goods and services are covered for around one hundred eighty days, while bulk commodities and small capital goods are covered for double that amount of time.
The other type of policy is medium-term export credit insurance. For large capital equipment, this provides 85% of the coverage for a period of up to five years. ECI insurance can be for a specific single buyer.
However, some policies cover expansive businesses that work with multiple buyers. Make sure your insurance provider is willing to work with you to find the right type of coverage for your specific needs.
What to Look for In an Export Credit Insurance Provider
Many businesses attempt to work directly with an export credit insurance provider. However, there are a few reasons why you shouldn't do this. First, unless you have industry contacts, it can be a challenge to find one that fits your needs.
Second, these insurance contracts can often be filled with complicated jargon. This can lead to gaps in your coverage that can cause you to pay full price for your losses even though you're paying for insurance premiums. So what's the solution?
We recommend working with a broker like the kind found at ARI Global. For starters, these professionals can help answer any frequently asked questions you might have about this type of insurance.
However, more importantly, they're an advocate for your business. They'll learn about your interests and then represent you in front of an insurance company.
What's more, if they're well established, they'll have access to insurance companies that you won't be able to find on your own.
These help you find the perfect insurance companies and quotes for your specific needs. That's why we always recommend brokers to help you find the perfect export credit insurance providers.
Ready for the Export Credit Insurance You Deserve? Contact ARI Global
We hope this guide helped you learn more about export credit insurance. Here at ARI Global, we know how confusing the world of trade insurance can be.
That's why we serve as a bridge to connect businesses to the insurance companies and lenders they need. What's more, we're also passionate about educating our clients on the different options available to them.
So whether you need a question answered or you're looking to be connected to the right type of insurance company, contact us today to get started.