Export Credit Insurance | Definition & Benefits

What is Export Credit Insurance?

Export credit insurance helps companies remain competitive by offering open terms when letters of credit or prepayment may have previously been the only safe way to do business. In fact, foreign companies buy an average of 40 percent more when they are offered open terms, according to the World Trade Organization. Export credit insurance providers protect your sales from political risks, including import/export changes and foreign government intervention.

Few companies can effectively compete without extending credit to their buyers. For exporters, getting credit insurance levels the global playing field.

Working with new countries means dealing with new cultures and new opportunities to access new markets and customers. Businesses must know how to manage the associated risks that come with exporting products or services.

Export Credit Insurance Flyer

This flyer gives an overview of the benefits Allianz Trade offers through export credit insurance.

Learn how to stay competitive and offer open terms to help your business grow.

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Benefits of Export Credit Insurance

Gain a competitive edge overseas

When your competitors insist on costly, burdensome Letters of Credit and you offer open terms, you win

Improve your financing options

Include foreign A/R in your borrowing base when it's backed by our AA S&P rating

Overcome commercial & political risks

Take advantage of options that help you overcome unforeseen payment issues in an increasingly unpredictable world

Enhance your multinational operations

Allianz Trade provides a single, streamlined platform for determining global credit

Why do businesses get export credit insurance?

There are a lot of use cases that drive exporters to get a trade credit insurance policy initially. To help illustrate how you might use this tool to benefit your business, below we look at how some Allianz Trade customers have made the most of their export credit insurance.

Evaluate international businesses of all sizes

Many companies will feel confident about their credit department's ability to evaluate larger businesses and governments in foreign markets. However, they'll find that they need a better solution when assessing the creditworthiness of smaller businesses or intermediaries. This is where export credit insurance comes in.

In the case of Allianz Trade, we are a global credit insurance carrier with hundreds of risk experts located directly in markets around the world. These agents gain insights into local businesses, payment practices, and potential geopolitical risks so they can provide a comprehensive profile of international buyers of all sizes.

Genetec, a Montreal-based security platform provider, is a great example of a company that produces the majority of its revenue from international sales and uses credit insurance as a framework for credit decision-making.

"Our internal credit staff uses that [credit insurance] framework to evaluate credit requests in a way that wouldn’t be available to us on our own," said Alain Côté, Genetec's Chief Financial Officer. "We can expand our business to smaller customers and customers in little-known markets and make credit decisions rapidly and confidently.”

Read the Genetec case study

Accelerate growth in new markets

Companies want to put their best foot forward when seizing new opportunities in international markets and channels.

Export credit insurance helps businesses offer more flexible credit without taking on overwhelming bad debt risks. The financial intelligence and risk protection provided by a credit insurance policy helps companies achieve greater speed to market and sales growth.

Protect against political risk

Imagine this scenario: your company has shipped millions of dollars worth of meat to loyal customers in Russia, but the country enacts an embargo against your own and won't allow the shipment to be delivered. You now need to reroute the shipment, and you're facing a market price reduction of 30 percent.

Better relationships with customers and banks

Expanding into new markets often requires businesses to adjust credit risk processes to fit the different needs and expectations of customers abroad. Working with customers on a cumbersome cash-in-advance or letter-of-credit basis can create friction and hamper growth.

Let's look at the example of PolyQuest, North America's largest distributor of PET resin (polyethylene terephthalate), and the leading processor and manufacturer of recycled PET scrap.

While its credit processes were well-suited for North America, when PolyQuest expanded into Europe the different cash conversion cycles necessitated more extended payment terms for customers. PolyQuest used trade credit insurance to protect against the risks of offering these extended terms.

International expansion also often leads businesses to borrow more from banking partners. Many businesses will insure receivables so that banks in the EU and elsewhere are willing to lend against these assets. PolyQuest leverages this trade credit insurance benefit as well.

"Allianz Trade has been extremely important in allowing us to grow via borrowing from the bank in our ABL [asset-based lending] arrangement in Europe," says Mike Moran, Financial Controller and Credit Risk Manager at PolyQuest.

Read the PolyQuest case study

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Best practices to alleviate export credit risk

Whether you have export credit insurance or not, there are still many ways you can take steps to mitigate risk while doing business internationally. Exercising the following precautions can only benefit your business and help you protect your finances while expanding your growth even more.

Research Potential Export Credit Risks

Doing your research means identifying the main risks linked to export in that country. This could include risks of non-payment, foreign exchange risks or political risks. Find out the specifics for the country of export, as many have very specific export/import requirements. You may also encounter bribery and corruption in some countries. Be prepared for these risks and how to deal with them. Being prepared for these risks makes a big difference when trying to recover payment. You can refer to Allianz Trade country reports and collection profiles to help you in this research.

Doing your research also means finding reliable information to check your customers. Get up-to-date information to balance the need for increasing sales while getting paid. Keep in mind that legal obligations and access to information are not the same everywhere.

Ensure Your Export Contract Paperwork is Accurate

If you haven’t done so already, get your terms and conditions checked by a lawyer who has export and import experience to avoid potential risks, such as harsh late delivery penalties, onerous indemnity clauses and clauses related to the transfer of intellectual property. To minimize disputes and litigation, contracts should include all essential terms and include a clause that mentions if payment is delayed past the due date, the buyer is liable for third party collection costs incurred, late payment interest and legal charges. Contracts should also be clearly written with unambiguous language and specify the law that governs the agreement.

Ensure that your terms and conditions are in hard copy at some stage. These could be printed off by the buyer and signed and dated. It’s much better to do this before the order is placed, just like ticking terms and conditions when placing an online order.

Maximize Your Chance to Secure Payment

Make sure you understand the local legal procedures and linguistic aspects to anticipate non-payment. Know how to conduct an out-of-court negotiation.

Build Long-Term Relationships

In many countries, a commitment to building long-term personal relationships is vital for your project to get off the ground and succeed. It can take significant time to build trust and understanding, so get started as soon as you can. Being flexible can also help build lasting relationships. Be ready to adapt to your market entry plan and products as you proceed. Good relationships with local partners will help you get the feedback you need to hone your efforts.

Vet Partners Carefully

Do thorough due diligence on partners, acquisition targets and other companies you hope to deal with. It’s vital to investigate a potential strategic partner’s reputation and financial health. Make a list of criteria they must meet and be disciplined about sticking to it. Businesses sometimes get caught up in the excitement of a venture and make the mistake of making a deal with a company that isn’t a good strategic fit because, for example, the financial terms are attractive. Your partners should understand your business goals and share your values.

Be Patient and Persistent

Don’t expect quick sales, much less quick profits. As your expansion progresses, keep learning, tweaking your efforts and getting better. If you encounter difficulties, remind yourself that it’s common for a company’s first foreign venture to stumble.

It can take two to five years to recoup your investment, depending on the country. Make sure you monitor your progress and what’s going on in your markets to stay ahead of changes and update your planning as needed.