Export Credit insurance: What Is It And Do You Need It?
Export Credit insurance: what is it and do you need it?
For those who are in the business of exporting goods and raw materials, it is worth considering taking advantage of export insurance, or export credit insurance. Export insurance simply reduces the payment risk associated with foreign trade. There is no question that international trade with foreign buyers can be a complex business transaction. Export risk insurance is designed to guarantee payment on the commodities you export to foreign partners and, therefore, protect you against non-payment risk.
However, when you are considering export insurance, there are many nuances to keep in mind. To get a more comprehensive understanding of export insurance and sift through who needs it, let's dig a little deeper.
Export Insurance Explained
Shipping raw materials or products overseas certainly brings payment risk along with it. And there can be many reasons why payments would not be made, though some are more common than others. For instance, if the goods you are shipping arrive damaged or destroyed, the importer may not be obliged to pay.
In this instance, an export insurance policy would come in handy. How would it work? For starters, the policy would usually be issued in the exporter's name, who in turn would assign the policy to the importer, or buyer. This would be done by endorsing the policy over to them. The result would mean that even if the goods were damaged in transit, the importer would still be able to claim under the policy in their own name.
While this is a common example, there are many other factors to consider. Think of it this way: a shipment of materials is a concentration of capital, and depending on the rarity or worth of the items, the cost of that shipment could have a significant impact on the exporter. In some instances, failing to factor in the risk associated with global shipments of this size could cost an exporter more than they can afford.
The benefits cannot be overstated
On a basic level, a business should be protecting their products until they are safely in the hands of their buyers. Exporting items overseas is no different, and you should not treat it differently. If anything, you should take additional precautions that you might not take if you were shipping a package down the street, for example.
For one thing, the inventory you are shipping will be a significant one. Losing capital on a shipment of that worth is going to have heavy consequences for the exporter. And while damages to products are a big reason for this insurance, there is also the risk of theft.
The export business will sometimes send items to volatile regions. Having export insurance on your side can reduce the risk of non-payments in these areas.
And in addition to reducing risk, export insurance also gives the exporter additional control. Just like no product is alike, no exporter is alike, and when these factors are considered together, there is significant room for diversity in the export business. Export insurance policies are designed to be as unique as the company and products they are protecting. For example, as an exporter, you have a unique set of products, destinations, costs, and strategies. Therefore, you should have a policy in place that considers all of these factors, from identifying the areas where you are likely to incur the most risk en route, to proper coverage costs affiliated with your goods.
And having export insurance on your side will also broaden your ability and your popularity to trade with others. Importers want to do business with an exporter who has taken the time and consideration to make sure the business deal has as little risk as possible. Therefore, having export insurance will strengthen your profile on a global level when it comes to trade. On a basic level, it helps establish trust.
Who needs export insurance?
Businesses in the export and trade markets should take advantage of export insurance. It reduces risk in ways that you might not have thought of. Additionally, it is a common misconception that export insurance will protect the same way as business insurance, or marine insurance, but this is not the case. Export insurance is its own, and should be relied on to mitigate the maximum amount of risk possible. Business insurance can often fall short of full protection, as many business insurance policies may not cover shipments going to international partners.
Additionally, while marine insurance may cover your vessel, it might not necessarily protect all of the cargo on board. And even if you have cargo insurance for that exact reason, it's worth considering other possibilities that a buyer might not pay once the goods have arrived safely. While these are not pleasant considerations, regulations pertaining to politics and foreign trade are changing all the time. Only export insurance will be there for you when you need it the most.
Nobody wants to be stressed out about the state of their business. In fact, you don't even have to be in a pattern of loss for stress and worry regarding the status of your shipment to keep you from focusing on other ongoing aspects of the business. With export insurance, you can relax and put the payment burden elsewhere. You can rest assured that your commodities are protected, and the risk of not receiving payment is drastically reduced. And if something were to go wrong, you can rely on the professionals at COFACE to be on your side.
COFACE trade credit insurance has global experience in mitigating risk, helping businesses with their operations, and working with their partners to maintain ongoing cash flow. We are well-positioned to help asses payment problems and get ahead of potential risks by offering personalized advice based on your specific situation, market, and goals.
To find out more about how we can help you, contact us today for a free quote.
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