Propelling Exports Through Trade Credit Insurance
HOW AIR TRACTOR AND OTHER COMPANIES ARE WORKING WITH THE EXPORT-IMPORT BANK OF THE UNITED STATES
When Trilithic, Inc., an Indianapolis manufacturer of test and measurement equipment, started to export 12 years ago, the company’s commercial bank required it to insure its overseas receivables to collateralize those assets against its line of credit. Trilithic procured such a policy from the Export-Import Bank of the United States (Ex-Im). Though the company now ships 40 percent of its products overseas and is no longer required to carry trade credit insurance, it still maintains its policy with Ex-Im.
Air Tractor Inc. of Olney, Texas, was in a different position. The manufacturer of agriculture and firefighting airplanes exports 50 percent of its products under terms that require customers to pay off the aircraft in five years. To receive its money quicker by selling those loans to U.S. commercial banks, Air Tractor insures the loans through Ex-Im.
“We first vet customers internally to determine whether they are good credit risks,” says David Ickert, vice president of Finance for Air Tractor. “If Ex-Im’s underwriting committee responds affirmatively, we pay a premium and Ex-Im issues an insurance policy for that loan. We then have the ability to sell that loan to a U.S. bank and that lets us roll our cash.”
Trade credit insurance allows exporters to offer competitive terms of sale without insisting on up-front cash or receiving cumbersome and time-consuming letters of credit. Credit insurance protects accounts receivable against customers who can’t pay due to insolvency, political risk, exchange-rate fluctuations and a host of other factors. Policies are available from private-sector credit insurers such as Atradius and Coface as well as from Ex-Im.
“Export credit insurance is bought for three main reasons,” says Walter Kosciow, vice president for Short-Term Trade Finance at Ex-Im. “One is for financing the cash cycle. You want to get cashed out as soon as possible and a lender won’t take the risk without a policy.
Second is for marketing. You’re able to extend more competitive terms to overseas customers. The third is for risk management. You’re able to sleep better at night knowing you can sell to some riskier customers.”
Ex-Im Bank is an independent federal agency that offers trade credit insurance as well as other financing mechanisms, including loan guarantees and direct financing to help foreign buyers purchase U.S. goods and services. (See sidebar.) In fiscal year 2014, Ex-Im Bank supported more than 3,700 export transactions worth more than $27 billion.
“Our business model is based on underwriters being close to the risk, not close to the customer,” says David Huey, president and regional director at Atradius. “We have underwriters in overseas markets who understand the market, the legal situation and the culture so we can advise exporters on where it is safe to sell their products.”
Atradius and Coface underwrite trade credit insurance by accessing a database on millions of companies around the world. “But this information has to be put in context,” explains Kerstin Braun, executive vice president at Coface North America. “Some customers’ balance sheets may look iffy but our specialists can put it in the perspective of the buyer’s country.”
Trade credit insurance generally insures a portfolio of transactions up to a certain limit–the premium being based on the volume of sales, loss history and the quality of the buyers–and offers the opportunity to buy additional protection should the need arise. “We conform to Ex-Im’s underwriting guidance and that qualifies us to self-underwrite up to a $200,000 limit for any one customer overseas,” says Jeffrey Hale, president of Trilithic. “Some of our customers voluntarily supply additional financial information which allows Ex-Im to separately underwrite at a higher limit.”
Of the 50 percent of Air Tractor’s sales that are exported, half are insured by Ex-Im. The other half goes to markets such as Australia, where banks will loan money to customers for this type of purchase. Air Tractor receives cash up front and for the rest, “We are able to move forward with the transaction once we have the insurance and before we sell it to a bank,” says Ickert. “This medium-term credit insurance has allowed us to go from 10 percent exports to 50 percent in 20 years.”
Now that Trilithic is no longer dependent on insurance for financing, and although the company has never experienced a loss, it continues to maintain a policy. “It is one of the lowest cost and most efficient products that we can use for risk management,” says Hale. “The cost of a loss for us would be dramatic and the ROI on the insurance policy is such that it makes good business sense to carry it. The other part is that we are in a cyclical business. Right now we are in a strong period and not borrowing on our line of credit. But when a downturn comes and we want to rely on our foreign receivables, we are ready to go when the bank tightens up.”
Latin America: The Winners and Losers of Trumponomics