Export credit insurance or trade credit insurance is an essential tool to safeguard your accounts receivables. There are several ways to insure your foreign receivables, including invoice factoring or the letter of credit from export-import banks. With the number of alternatives available, you may be wondering whether export credit insurance is ideal for you.
This post will focus on the merits and demerits of trade credit insurance. Let’s delve in:
Advantage of an Export Credit Insurance
Trade credit insurance not only comes in handy when working with a foreign buyer or in foreign markets, but it also benefits organisations that carry out business locally. Some of the advantages of trade credit insurance policies include:
- Expand into new markets – Working with a foreign buyer or in foreign markets exposes your investment to several risks. Luckily, with a credit insurance policy, you can reduce credit risks like the risk of nonpayment and improve your customer acquisition strategy. With an export trade insurance policy, you can comfortably expand to new markets, knowing that you will be compensated should your clients or customers default payments.
- Peace of mind – With a trade credit insurance policy, you will be sure to receive your compensation if you cannot convert on your account receivables. This way, you will also minimise the risks of nonpayment and safeguard your company’s investment.
- Safeguarding critical accounts – If the exit of one client can adversely affect your business, an export credit insurance policy will help to guarantee the stability and continuity of your business.
- Opportunities for better financing – Most banks and financial institutions hesitate to offer loans to businesses engaging in international trade. With an export credit insurance policy, your financial institution will be ready to lend against foreign receivables, acknowledging that your policy fully backs them.
Disadvantages of Export Credit Insurance Policy
Although credit insurance may be beneficial to your business, there are several drawbacks to taking these types of policies. They include:
- The Policy may not cover high-risk accounts – In most scenarios, the trade credit insurance policies may not be available for accounts with high credit risk. Besides, those that offer the coverage often charge very high fees.
- Varying exclusions and limitations – You might have to ensure you are working with reputable companies and understand the exclusions and limitations of your policy. Since different policies have varying limitations and exclusions, it may be challenging to understand this type of information.
- May not cover all nonpayment scenarios – Most policies cover factors like defaulting, bankruptcies, turmoil, and political instability. However, export credit insurance policies may not cover late payments, slow payments, customer disputes, and complaints about the quality of goods and services.
Is Trade Credit Insurance Right for You?
The size of your clientele, the average amount of credit you extend, the payment terms, the countries you operate your business, and the stability of the sectors your clients work in are some of the factors that may influence your need for export credit insurance.
Contact Niche Trade Credit to Learn More and Get Started
If you are not sure whether export credit insurance is right for you, Niche Trade Credit is here to offer the help you need. Contact us today to discover whether your need a credit insurance policy and which type of insurance will suit your company.
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