The best way to protect yourself against customers who can’t pay is to thoroughly investigate foreign customers and high-risk companies. A sure way to reduce your overall risk is to purchase insurance that will protect you in case you do get stuck. There are several types of policies available:
Export Credit Insurance
Small businesses can reduce foreign payment risks by purchasing Export-Import Bank of the United States export credit insurance through an insurance broker or directly from the Export-Import Bank. The insurance:
- Covers exporters against the failure of foreign buyers to pay their credit obligations for commercial or political reasons
- Enables exporters to offer foreign buyers competitive terms of payment
- Allows exporters to penetrate higher-risk foreign markets
- Gives exporters and their banks greater financial flexibility in handling overseas accounts receivable because the proceeds of the policies are assignable from the insured exporter to a financial institution.
Small Business Insurance Policy
The Ex-Im Bank offers a short-term (up to 180 days) insurance policy geared to meet the particular credit requirements of smaller, less experienced exporters. Spare parts, raw materials, and consumer goods are products typically supported under short-term policies. Under these policies, the Ex-Im Bank assumes 95 percent of the commercial risk and 100 percent of the political risk involved in extending credit to the exporter’s overseas customers.
The Small Business Insurance policy frees the exporter from “first loss” commercial risk deductible provisions that are usually found in insurance policies. It is a multi-buyer type policy that requires the exporter to insure all export credit sales. It offers a special “hold-harmless” assignment of proceeds that makes the financing of insured receivables more attractive to banks. This special hold-harmless coverage is available to companies that meet the Small Business Administration’s definition of a small business and have an average annual export credit sales volume of less than $3 million for the two years prior to application.
Short-Term Single Buyer Policy
For exporters who don’t want to insure all of their short-term export credit sales under a multi-buyer type of policy, a single-buyer policy is available to cover single or repetitive sales to the same buyer. The no deductible policy offers 90 percent to 100 percent coverage for political risks and commercial risks of default (depending on the type of buyer, terms of sale and product). A special reduced minimum premium is available to small businesses.
Medium-term insurance is available for exporters of capital goods or services in amounts of $10 million or less and terms up to five years. The Ex-Im Bank offers 100 percent commercial risk and political risk protection of the insured portion (85 percent of the U.S. export value). Although similar to the guarantee program, medium-term insurance is more conditional because the Ex-Im Bank does not review export documents for completeness until a claim is filed.