Export credit insurance is a policy offered by both government export credit agencies and private entities to businesses that want to protect assets from the credit risks of importers. These risks include non-payment, currency issues and political unrest. Not knowing where an exporter is sending their merchandise is a risk that can potentially bankrupt a company. This insurance covers some of the possible losses.
Advantages to the Exporter
One of the greatest benefits for the exporter is its ability to offer or accept multiple forms of payment. The biggest risk an exporter faces is turning down prospective business because the form of payment can not be verified. With export credit insurance, risky letters of credit from importers are now acceptable by the exporter. The exporter can also now explore new, higher risk markets, increasing the potential for growth.
Who Sells The Insurance?
The need to insure against the risk of credit default by customers in international countries is very real. The Export-Import Bank of the United States, as well as commercial risk companies, sell this insurance to exporters. An export credit insurance company does not cover complete loss. Short-term policies cover up to 95 percent of default losses and longer term losses of approximately 85 percent. While this is not complete coverage, it mitigates the loss most companies are willing to take to build business alliances.
What Is Covered?
There is short- and long-term export credit insurance that typically covers consumer goods, materials and services for up to 180 days. Small capital goods, consumer durables and bulk commodities are covered for up to 360 days. Medium-term export credit insurance, that provides 85 percent coverage of the net value, covers large capital equipment up to five years. This insurance is usually part of the selling price and should be part of the exporter’s itemization.
Legal Pursuits Abroad
Another inherent risk of doing business abroad is not being able to take legal action against someone that has defaulted on payment. The risk of political unrest in some of these markets has made collecting accounts difficult. These risks prevent many entrepreneurs from venturing outside their comfort zone to capitalize on potentially profitable markets. The export credit insurance provides protection against a total loss as a result of new customers.
Brian Bass has written about accountancy-related topics and accounting trends for "Account Today." He works as a senior auditor specializing in manufacturing and financial services companies for one of the Big 5 accounting firms. Bass hold a master's degree in accounting from the University of Utah.