The Importance of Credit Insurance for Small Business Exporters
by Selma Canas | November 5, 2024
Credit insurance is a financial tool that protects businesses from the risk of non-payment on foreign sales. It can be a powerful tool for small business exporters, providing peace of mind and safeguarding their bottom line.
Export-Import Bank of the United States (EXIM) is a United States government agency that provides financing and insurance solutions to support American businesses as they compete in the global marketplace. It is an important source of credit insurance for small business exporters. EXIM’s Export Credit Insurance (ECI) program offers coverage against both commercial and political risks associated with exporting.
Why Credit Insurance?
Small business exporters face unique challenges when selling their products or services overseas. One of the biggest risks is the possibility of non-payment from foreign buyers. This can happen due to a variety of reasons, including:
- Political instability: Changes in government or political unrest can disrupt trade and make it difficult for buyers to fulfill their obligations.
- Economic downturns: Economic recessions or financial crises can lead to decreased demand for goods and services, making it harder for buyers to pay their invoices.
- Currency fluctuations: Changes in exchange rates can impact the value of currency and make it more difficult for buyers to pay their debts.
- Buyer insolvency: If a buyer goes bankrupt or is unable to pay their debts, the exporter may lose their investment.
Credit insurance can help protect businesses from these risks by providing financial protection in the event of non-payment.
How Credit Insurance Works
Credit insurance policies typically cover a percentage of the total value of a sale. If a buyer defaults on their payment, the insurance provider will reimburse the exporter for the covered portion of the loss.
The process of obtaining credit insurance involves several steps:
- Application: The exporter applies for credit insurance coverage from an insurance provider.
- Underwriting: The insurance provider assesses the creditworthiness of the buyer and determines the level of coverage that can be offered.
- Policy issuance: Once the underwriting process is complete, the insurance provider issues a policy outlining the terms and conditions of the coverage.
- Claim filing: If a buyer defaults on their payment, the exporter files a claim with the insurance provider.
- Claim settlement: The insurance provider reviews the claim and, if approved, reimburses the exporter for the covered portion of the loss.
Benefits of Credit Insurance
Credit insurance offers a number of benefits for small business exporters, including:
- Reduced risk: Credit insurance helps to mitigate the risk of non-payment, allowing businesses to focus on growing their export business.
- Improved cash flow: By providing financial protection, credit insurance can help to improve cash flow and reduce the need for working capital.
- Enhanced access to financing: Credit insurance can help businesses qualify for loans and other forms of financing by reducing the perceived risk of lending to them.
- Increased sales opportunities: Enables businesses to offer competitive credit terms to foreign buyers and take on larger orders.
Choosing the Right Credit Insurance Provider
When selecting a credit insurance provider, it is important to consider the following factors:
- Coverage limits: The provider should offer coverage limits that are sufficient to protect your business from significant losses.
- Underwriting process: The provider should have a streamlined underwriting process that allows you to obtain coverage quickly and easily.
- Claims handling: The provider should have a proven track record of handling claims efficiently and fairly.
- Customer service: The provider should offer excellent customer service and be responsive to your needs.
By carefully selecting a credit insurance provider and understanding the benefits of credit insurance, small business exporters can protect their business and achieve their export goals.
Credit Insurance Agencies
In addition to EXIM, several credit insurance agencies offer protection for businesses against non-payment from foreign buyers. Some of the major players in the industry include:
- Allianz Trade: Customers come to Allianz Trade for predictive insights to stop most bad debts before they happen, and credit insurance to cover the unexpected losses.
- Coface: A leading expert in credit insurance, debt collection and information services, acting for trade since 1946.
- Atradius: Trade credit insurance from Atradius is a straightforward, cost effective and flexible way to ensure you get paid for goods and services you supply within the United States and abroad.
As a small business exporter, credit insurance can be beneficial in protecting your business from the risk of non-payment on foreign sales, therefore take time to research your best option for peace of mind in the future.
Selma Canas, CGBP
Canas, Consultants, International Consultants 2, TampaNASBITE Certified Global Business Professional (CGBP), Florida SBDC at USF, Tampa
Specialties: International Trade, Export Marketing Plans, Market Research, Digital Marketing
As an international trade specialist at the Florida SBDC at University of South Florida, Selma Canas is responsible for guiding small businesses through the complexities of the international trade process through one-on-one consulting, training and resources. Canas is a NASBITE International Certified Global Business Professional (CGBP) and teaches courses on international trade basics and market research at the Florida SBDC at USF. For export-ready companies, she develops Export Marketing Plans in partnership with SelectFlorida. She has developed more than 40 plans during the past eight years and participated in trade missions to Brazil, Chile, Canada, the Dominican Republic, and Panama.