Advantages & Disadvantages to Using Export Credit Insurance
Export credit insurance (ECI) policies can be purchased from commercial insurance carriers as well as the Export-Import (Ex-Im) Bank of the United States as a way to insure against the risk of credit default by international customers.
The ability to insure against loss due to default when exporting to foreign markets has distinct advantages but carries a few disadvantages as well.
Reduced Default Risk
The reduction of default risk is the most obvious advantage of carrying an ECI policy, and it is the primary reason businesses purchase and maintain this type of coverage.
The challenge, and sometimes impossibility, of taking legal action or initiating collections efforts against a foreign debt-holder may cause businesses to avoid exporting altogether, causing them to miss out on profitable trade opportunities.
With an ECI policy in hand, you can feel free to extend credit to your international customers without worrying about the risk of non-payment.
Favorable Financing Terms
Accounts receivables covered by export credit insurance are looked upon more favorably than normal, unsecured international receivables in the eyes of banks and lenders, giving your business access to more favorable credit terms, which in turn can allow you to grow your business more rapidly through increased leverage and, according to exim.gov, increase your overall cash flow.
The elimination of default risk can also allow your company to offer more favorable credit terms to your international customers, since a smaller amount of loss must be absorbed by your “good” customers in the form of higher interest rates and fees.
While the risk of default in international accounts receivables is very real, it is still quite possible that all of your international customers will pay their debts on time and in full.
If this is the case, then if you have held an ECI policy, you will have taken a small loss due to the insurance premiums that your business has paid without receiving any type of claim reimbursement.
This is the risk inherent in any insurance policy and must be weighed against the possibility and value of potential defaults.
An export credit insurance provider will not necessarily reimburse you for the full amount of your non-payment losses.
According to trade.gov, short-term ECI policies typically cover 90-95 percent of the value of default losses, while longer term policies typically cover about 85 percent.
This amount is by no means insignificant, but it can still cause your company to experience a slight loss even if you are paying regular insurance premiums.