WHAT YOU NEED TO KNOW ABOUT TRADE CREDIT INSURANCE
Many exporters get so excited about winning new business overseas that they forget about the potential risks. The hazards they overlook may include business perils like not getting paid by distant scammers and political risks such as the installation of a new government that seizes shipments or won’t let money out the country easily.
“They never step back, take a look at the big picture and recognize that all of their risk is concentrated in one or two vendors, one or two types of goods, or one or two countries,” says Steven J. Boyne, co-chair of the Insurance Practice Group at the Gunster law firm in Jacksonville, Florida.
Risks may be accelerating. Euler Hermes, a global provider of trade credit insurance, found in a May report that business bankruptcies in the U.S. are expected to rise by 3 percent in both 2016 and 2017, after six years of steady declines. The Asia-Pacific region will see a 13 percent increase, according to the report’s projections, while Latin America will witness an uptick of 17 percent. The report cites causes such as weak long-term growth, increased turmoil in sectors like commodities and the domino effect of major bankruptcies.
Fortunately, there are well-tested ways to reduce the risks that you won’t get paid by your export customers. For exporters who do business overseas frequently, getting a trade credit insurance policy can bring more security. “What credit insurance does is protect you against the nonpayment of your receivables,” says James Daly, CEO and head of Euler Hermes Americas. Trade credit insurance will also bring your insurer’s help in collecting very overdue receivables or with recovering what is owed to you after a client becomes insolvent.
Boyne says some of his clients have collected 65 cents on the dollar on their late receivables through their trade credit insurance policy. “Frankly, getting 65 cents on the dollar from a country like Venezuela is pretty good,” he says.
Useful as trade credit insurance may be, perusing plans to find the right one is generally as much fun as reading the legal notices in a newspaper. “These policies range from 20-page to 600-page documents,” says Michael Senderovich, founder and president of Zeyger Insurance Services LLC in Woodland Hills, California, who works with small and midsize exporters in manufacturing and other fields.
Here’s a handy crib sheet to help you figure out if you need trade credit insurance, what type of policy to buy and how to keep your costs in line with your budget.
FIND AN EXPERT BROKER
Trade credit insurance is so complicated that most people outside of the insurance field find the policies hard to understand. Senderovich recommends asking trusted brokers of your other insurance policies to recommend a broker who has expertise in this niche, so you can tap your broker as a guide.
“You’re not going to go to an attorney who does real estate to get a divorce,” says Senderovich. “If the broker doesn’t know what they are reading, they are putting their client in a bind.”
CREATE THE RIGHT RISK-MANAGEMENT STRATEGY
If you run a small company or export to just a handful of overseas clients, you’ll probably only need an occasional solution to your export credit insurance needs.
One non-insurance option that many businesses use is a letter of credit from a bank. This is a letter that one bank issues to another to guarantee that payment for an order will be made. Letters of credit can be a relatively easy solution, but the fees—often between 1 percent and 3 percent of a deal—can add up if you find yourself trading more frequently than you expected.
Another option is single-buyer trade credit, which is available through brokers and the Export-Import Bank of the U.S. Ex-Im’s policies offer protection against political and commercial risks such as a bankruptcy that disrupts a transaction with a single export client.
For businesses that do a high volume of overseas transactions, buying a policy that covers all of their overseas buyers is often worth it—and is often required by the bank that issued their line of credit. However, given the complexity and costs of many policies, it may offer too much horsepower for a small business. “They need to have more than $1 million of annual sales to consider it,” says Boyne.
Premiums for these policies tend to be priced more attractively than for single-buyer policies. “From an insurance company’s point of view, they are spreading good risk over bad risk,” Boyne concludes.
GET THE RIGHT PRICE
By all accounts, pricing for trade credit insurance is highly complex. Generally speaking, insurance companies take into account a matrix of risk factors in setting premiums, says Daly. “There is no simple, ‘What does it cost?’” he says.
If you are planning to sell your goods to a solid client such as Walmart in a stable country like Canada, your premiums will likely be lower than if you are trading in the oil and gas sector in Venezuela, for instance. However, if you sell to clients in a mix of industries and countries, your rates will reflect the risk across all of them. Generally speaking, Daly says, a company that does $10 million to $20 million in annual sales might need to budget between $20,000 and $30,000 for annual premiums. That is a substantial amount but Daly says it is important to compare the cost to other methods of reducing risk, like letters of credit, to see if you come out ahead.
Shop carefully when you by trade credit insurance, experts say. Quotes aren’t always set in stone, according to Senderovich. “If the application is submitted and the underwriting team sees something they don’t like they will adjust the premium accordingly,” he says.
Make sure you also ask about any brokers’ fees that will be added to your premium, Senderovich advises. These can be all over the map. “They could be as little as $150 per transaction,” Senderovich says. “They could be $500. I’ve seen brokers’ fees of a couple of thousand dollars, where it’s almost 50 percent of the policy premium.”
Bear in mind that your policy probably isn’t protecting you from 100 percent of the risk in your transactions, Senderovich continues. Even if you invest heavily in a policy, you still need to be careful about which customers you choose. “People don’t realize you’re not insuring 100 percent of the risk,” says Boyne. “Maybe it’s 75-85 percent of accounts receivable in a transaction. You’re still going to take part of a loss.”
MAKE YOUR INSURER AN ALLY
One of the biggest benefits of a trade credit insurance policy is having access to risk management expertise that you might lack if you don’t have a department devoted to it at your company. Once you buy trade credit insurance, don’t hesitate to reach out to your insurance team if you need help researching a potential client whom your gut instincts tell you may be troublesome down the road. It will save you many hours of time and potential headaches later.
“They really understand the risks associated with your business,” says Boyne. “They can, in effect, act as your company’s risk management department. You really are getting a partner who helps you manage your risk.”
Daly gives an example of a manufacturer of electronic products who wants to export them into Latin America. “We would help our customers who are thinking about exporting to say we see this as an established trade group that will enable you to take advantage of an opportunity in that market,” he says. “We will help you identify safe buyers or customers to whom you can export. We will enable your growth by identifying where there is clearly a sales opportunity and at the same time a safe sales opportunity.”
Given all of the turbulence going on around the globe these days, safety is something worth considering if you can find a policy at the right price.
Be Prepared or Be Left Behind