How To Use Export Credit Insurance To Protect Your Export Transactions And Ensure You Get Paid No Matter What
It’s always a great feeling when an exporter secures a good deal to export certain commodities to buyers located in various places around the world. When everything is right in this scenario, the exporter would be earning good margins, building new global relationships, and subsequently growing their businesses.
But while a new buyer, new export order, or new income channel is a great opportunity for growth, they are not payment guarantees.
So What Do You Do To Guarantee Payment Fro Your Export Transactions?
The most secure method to guarantee payment is usually to ensure the buyer issues an irrevocable and confirmed Letter of Credit. But when the company is very large and well known, they’d mostly refuse to do this as they expect their reputation to precede them, and besides, a lot of other companies supply them goods with the expectation of getting payments in 30 to 90 days after delivery.
If you’re stuck in this dilemma, what then do you do to guarantee your payment in a secure manner even when a signed contract is not enough?
The answer is Export Credit Insurance.
What Is Export Credit Insurance (ECI)?
Export Credit Insurance (ECI) is a form of insurance that protects an exporter of commodities, products and services against the risk of non-payment by an international buyer.
In other words, Export Credit Insurance greatly reduces the risks of nonpayment by foreign buyers of your products and services by giving the exporter a form of conditional assurance that payment for the commodities will be made to them by the issuer of the insurance policy if the international buyer refuses or is unable to pay.
In simple terms, if any exporter with Export Credit Insurance ships a commodity without getting a Letter of Credit or part-payment from the international buyer and the international buyer refuses to pay for whatever reasons despite the exporter meeting all the terms of the agreement, the insurance body would pay the exporter 100% of the agreed amount as per the insurance terms and conditions.
What Type Of Risks Does Export Credit Insurance Usually Cover?
Beyond just commercial risk of non-payment of goods by the international buyer, Export Credit Insurance covers much more than just commercial risks.
The risks that Export Credit Insurance generally covers are:
- Commercial risks (such as insolvency of the buyer, bankruptcy, or protracted defaults/slow payment)
- Political risks (such as war, terrorism, riots, and revolutions)
- Currency convertibility
- Changes in import or export regulations
- And much more
The Export Credit Insurance can be offered either on a single-buyer basis on a product or service or on a multi-buyer basis. The ECI can also be setup for a short-term (up to one year) or medium-term (one to five years) repayment period.
Benefits Of Export Credit Insurance
1). Protection Against Risk:
The existence of commercial, political, currency fluctuations, and more risks gives Export Credit Insurance a great valuable boost because it helps the exporters to protect their downline and enable them to grow thriving businesses.
2). Grow Your International Trade Activities:
Export Credit Insurance enables exporters to expand to newer markets faster and without fear than they would have because the risk of non-receipt of payments is greatly reduced since the insuring body would be responsible for guaranteeing payments anytime the international buyer refuses to make payment for whatever reasons.
3). Secure Access To More Finance:
Most banks, financiers, and more want to only provide funding to companies that do not just have a trade track record but can also guarantee the security of their funds. With Export Credit Insurance in place, you will boost the confidence of these financiers and improve your chances of securing the funds required to finance your trades
4). Transfer The Burden Of Credit Risk:
With so much to worry about like sourcing international buyers, ensuring quality standards are met, and much more, securing Export Credit Insurance transfers the burden of the credit risk management to the insuring body, while you go on to focus on other things that matter to you.
ECI would also enable you to easily meet the risk management requirements of your stakeholders or board and provide peace of mind
So What Do You Do To Secure Your Export Payments Going Forward?
If your international buyer is refusing to issue a letter of credit but has a strong international reputation for paying suppliers regularly and on time, you could still go ahead with the transaction, but insure it against an Export Credit Insurance policy. This way, you can guarantee your payments and ensure that no matter what happens, you’d still get paid.
But the perfect payment security scenario would be to secure a Letter of Credit and still secure an Export Credit Insurance certificate. This way, you’d be double guaranteeing the payments for your export transactions.
What Organisations Offer Export Credit Insurance?
The organisations that offer export credit insurance are:
- Export Import Banks (e.g the Nigerian Export Import Bank [NEXIM])
- Private Insurance Companies
To Sum It Up
Trading goods internationally could be very profitable for any exporter, but guaranteeing payments for your export transactions will not just provide you peace of mind, but would also build confidence in your ability to execute in the eyes of your financiers.
If you’re looking to venture into the international trade business, understanding Export Credit Insurance alongside Letters of Credit and how they can help you guarantee the security of your investment is key to success.
What are your thoughts on how to use Export Credit Insurance to secure your export payments? Let me know by leaving a comment below.
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