In the dynamic landscape of international trade, where businesses strive to expand their footprint across borders, the role of Export Credit Insurance (ECI) emerges as a critical component. When businesses decide to work in new markets, they are also required to adjust their credit risk processes to align with the unique needs and expectations of their customers and stakeholders abroad. In this context, ECI serves as a safeguard for exporters, protecting against the risks associated with non-payment by foreign buyers.
Understanding Export Credit Insurance
ECI offers financial security for exporters by providing a conditional guarantee of payment if a foreign buyer cannot fulfil their payment obligations due to a variety of reasons including political volatility.
For instance, imagine you set up a company abroad but the country goes through volatile political events that causes them to enact an embargo against your country, following which you have to reroute shipments and factor in a market price reduction of 20 to 30 percent. That's exactly why a solid export credit insurance can help recoup from any financial loss.
Characteristics of Export Credit Insurance:
Check out the following characteristics of export credit insurance:
Applicability and Risk Sharing:
- Using ECI for open account terms and pre-export working capital financing is advisable.
- Exporters assume the risk of the uncovered portion of the loss, and compliance with policy requirements is crucial to claim approval.Pros and Cons:
- Pros include offering competitive open account terms and minimizing non-payment risk in the global market.
- Cons involve the cost of obtaining and maintaining an insurance policy and the risk-sharing aspect in the form of a deductible.Coverage and Duration of Export Credit Insurance:
- Short-term ECI provides 90 to 95 percent coverage against commercial and political risks for consumer goods, materials, and services for up to 180 days.
- Medium-term ECI, with 85 per cent coverage of the net contract value, typically extends to extensive capital equipment over five years.
- It's always better to have coverage before customer issues arise.
Benefits of Export Credit Insurance:
Businesses strive to put their best foot forward when they explore new opportunities in international markets. A key benefit of export credit insurance is that it helps businesses offer more flexible credit without getting exposure to bad debt risks. It also helps businesses achieve greater sales growth and speed in the market.
The following are few more benefits of export credit insurance:
Risk Mitigation for Non-Payment:
- Even creditworthy buyers might face unforeseen circumstances leading to default. ECI mitigates this risk, allowing exporters to offer open account terms confidently.Market Expansion and Increased Sales:
- Reduced non-payment risk enables exporters to increase sales, establish market share in emerging markets, and compete more aggressively globally.Improved Borrowing Capacity:
- Lenders are more willing to increase an exporter's borrowing capacity when foreign accounts receivable are insured, leading to more attractive financing terms.No Coverage Duplication:
- While ECI protects against non-payment risks, it does not duplicate coverage for physical loss or damage to goods, which can be covered separately through marine, fire, casualty, or other forms of insurance.
How to Avoid Export Credit Risks
Here are a few ways to avoid export credit risks:
Conduct thorough due diligence on potential customers to assess their creditworthiness
Use secure payment methods to ensure timely and reliable payments
Diversify the customer base to reduce dependency on a single market or customer
Obtain credit insurance to protect against non-payment risks effectively
Develop a comprehensive export plan and seek advice from experienced professionals
Stay updated on international trade regulations to ensure compliance
Monitor political and economic stability in target markets to assess potential risks
Summing up, export credit insurance is fundamental to global trade success. It provides confidence to exporters in navigating international markets. Businesses must understand its characteristics, benefits, and risks. By adopting export credit insurance and risk mitigation best practices, exporters can achieve sustainable growth and contribute to international commerce.
