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Credit Insurance

Credit insurance mainly covers the following risks to the exporter:

  •  Non-acceptance of the goods by the buyer
  •  Insolvency of the buyer
  •  Unacceptable delays by the buyer in effecting payment (e.g. delays of over six months from due date for payment of goods accepted by the buyer)
  •  Blocking of the transfer of payments made by buyer
  •  Inability to convert local currency payments in to the required foreign currency
  •  Wars and civil disturbances outside the that prevent completion of the sale.

Credit insurance benefits the exporter by allowing him to price competitively while still pursuing business in areas where there may be a high risk of non-payment. The cost of Credit insurance should be weighed against the risk of complete loss on the whole transaction.

There are other incidental benefits for the exporter, some of which are as follows:

  • Buyers are keen to avoid being known as defaulters in international markets, since default will be noted by the exporter’s insurers and possibly be made known to other insurers too
  • So far as bankers and suppliers are concerned, the exporter’s Credit rating may be improved.

Credit insurance is available from commercial companies and, in some cases, from the government’s Exports Credit Guarantees Department (ECGD). Insurers offer a variety of services, some combining trade finance facilities and Credit insurance. Information is provided on existing and potential buyers and on  political and economic conditions, together with short- and long-term forecasts. Terms and conditions vary  from policy to policy, but the exporter’s individual requirements would be accommodated wherever possible.

The terms of most policies would require the exporter to comply with specific provisions, varying from the observance of agreed buyer limits and margins to the need for insisting on protest action in the event of the buyer’s non-acceptance or non-payment.

The exporter should seek independent advice about the most suitable package for his particular needs.

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Factoring, discounting, aval and forfaiting

The exporter can raise finance or obtain early payment against the invoice, bills of exchange and promissory notes. The processes involved are factoring, discounting, aval and forfaiting.

Bills of exchange and promissory notes have been used in international trade for a long time. This is because, in many countries, they are governed by specific legislation, so that parties to these instruments can be sued on their legal liabilities in courts of law, regardless of the rights and wrongs of any underlying transaction.

Factoring

Exporters can raise finance by selling invoices, at a discount, to a factoring company, which then collects the debts due itself. The general principles are as follows:

  •  Subject to suitable enquiries and arrangements being made with the exporter, the factoring company takes over the exporter’s trade debt.
  • The exporter relinquishes, to the factor, administrative responsibility for chasing buyers for payment and has no further contact with the buyer on the matter.
  • On shipment, the factor pays up to 80 per cent of invoice value and agrees a date for the balance to be paid (allowing a suitable period after the due date for payment by the buyer). Payment of the balance does not depend upon payment by the buyer.
  •  The factor's fees are based on the costs of managing the account and the number of invoices involved.

This kind of finance may be provided:

  •  Without recourse up to the amount of any available Credit insurance cover
  •  With recourse to the exporter for any amount not so covered.

It is likely that without recourse finance would be more costly to the exporter.



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