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What Is Whole Turnover Trade Credit Insurance? Do I Need It?

If you’ve been looking into protecting your balance sheet with trade credit insurance, you may be wondering what it means to purchase a “whole turnover” policy. What does whole turnover cover? What does it mean? Can it protect my cash flow? In this brief blog, we’ll answer all of those questions, and more! Let’s get started.

Whole Turnover Trade Credit Insurance Covers All Of Your Accounts Receivables

Up to a certain credit limit, whole turnover credit insurance will provide a percentage of coverage for your entire balance sheet.

These discretionary limits and the percent of cover that a trade credit insurance coverage policy offers are set when you purchase your policy.

As a rule, the higher the percentage of accounts receivables, the higher your premium will be. The same is true of each buyer covered – higher credit lines and higher invoices will mean a higher premium.

What this does is protect you from bad debts. Insured turnover means that, if your export trade company is not paid by a particular company, you can still recover funds, up to the limit set by your policy. This preserves your cash flow, and allows you to continue operating, even if a customer defaults.

Do I Need Whole Turnover Trade Credit Insurance?

This really depends on how many clients you have, how reliable they are, and their payment history.

In many cases, it may make more sense to simply cover individual clients or transactions with their own trade credit insurance policy. This is very common, and often done for particularly large sales, or when selling to companies that are new to the industry, or located in unstable nations.

Most often, whole turnover trade credit insurance policies are used for those who engage in wholesale trade or international trade with just a handful of large clients. These policies are the most valuable for companies who would face serious financial difficulties if any of their large clients fail to pay, or fail to pay in a timely manner.

So, if you tend to work with a large volume of companies and have smaller transaction amounts, you may not need whole turnover trade credit insurance. But if you work with just a few large companies, and you would have cash flow difficulties if any of these companies defaulted, you may want to consider whole turnover trade credit insurance.

Learn More From Niche Trade Credit Now!

Niche Trade Credit specialise in trade credit insurance services and whole turnover insurance. We can provide you with a reasonably-priced policy that will protect your company, and give you peace of mind. Contact us now to learn more.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Is Political Risk Insurance? What Does It Cover?

Political risk insurance is a unique subset of private insurance, used to cover infrastructure developers, importers and exporters, and other such companies from financial loss, due to the forced abandonment of a project or a client due to political instability, such as government action, political violence, and other political events that occur in a foreign government.

Often, this type of insurance is bundled with trade credit insurance, which is a type of insurance that covers the costs associated with a customer not paying their invoices, due to default or bankruptcy.

Curious to learn more about political risk insurance and what it covers? Read on, and learn everything you need to know.

What Coverage Does It Include & Exclude?

The coverage that your insurance will offer depends on your insurance company, and your policy. However, as a rule, most companies in the insurance market will offer political and economic risk insurance for the following events:

  • Political violence – This includes things like armed revolution, insurrection, war and civil war, terrorism, and other such political instability that can stop a project or a sale to a foreign country.
  • Governmental expropriation or confiscation – Should your property or project be confiscated by the government, political risk insurance can be purchased that will cover the cost of this confiscation.
  • Government repudiation or frustration of contracts – Most of these policies include provisions that cover costs if a government claims that a contract cannot be carried out, or unforeseen events lead to contract frustrations.
  • Wrongful or improper calling of letters of credit –  If a government or foreign financial institutions wrongfully call in a letter of credit, or another on-demand guarantee, insurance can cover the associated costs.
  • Business interruption – The costs of business interruption during a political event or other unforeseen circumstances can be covered by a political risk insurance policy, ensuring steady cash flow.
  • Inability to repatriate funds or convert foreign currency – If banking and currency issues, such as hyperinflation or a ban on moving currency to foreign countries results in the inability for your company to be paid, your policy will likely cover these costs.

Though other types of coverage may be offered, these are the most common. Often, you’ll have the ability to choose between each type of coverage, or purchase a policy that includes coverage for all major political risks.

Why Is Political Risk Insurance Important?

Because it helps you ensure long term success when working in emerging markets. It’s usually not necessary when working in OECD countries, and with companies in very stable countries – but it’s absolutely essential if you want to expand your reach, and work in countries that are not yet fully developed.

In the rare case that political instability results in a serious financial loss, your insurance company will step in, and compensate you for these lost funds – which ensures that your business can survive, even if it loses some of its biggest customers. This gives you peace of mind when working with customers and companies in developing countries.

Learn More From Niche Trade Credit Now!

Niche Trade Credit are experts when it comes to trade credit and political risk insurance. We can ensure that you have the right policy, and are protected from any political risks in the countries where you sell your products or services. Get started by contacting us right away. Call 02 9416 0670.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What is Export Insurance, Who Needs it and Why?

Export credit insurance (ECI) is a type of trade credit insurance tailor made especially for exporters of goods and raw materials. International trade with foreign buyers is often a complex undertaking. Niche Trade Credit (NTC) offers policies with the export trade in mind. Payment risk associated with shipping raw materials and products to customers can represent a real danger to an otherwise well-managed import/export firm or similarly situated business.

There are several common reasons why payments for exports are not made. Our insurance product is specifically designed to hedge against these risks. ECI incorporates the value of our other offerings such as political risk insurance or trade credit insurance but limits the scope to exports. The coverage allows more versatility and specificity for those who wish to limit their exposure while controlling the costs. You can rest assured that the trust you place in a foreign buyer is well insured with NTC.

If you are considering exporting to a foreign market, NTC encourages you to consider some key points;

  • Does the buyer prefer to trade on open accounts or a documentary trading basis instead of a letter of credit?
  • How stable are the import and/or export licenses?
  • What is the likelihood of contract repudiation?
  • What is the probability for the rejection of goods?
  • Have you considered non-payment for reasons of government intervention associated with political risk?
  • What is the financial health, history and credibility of the importer?

Any one of these factors, among others, can spell disaster for an exporter. Shipments of products or raw materials often represent a concentration of capital. Depending on the complexity or rarity of the products, a supplier could conceivably be wholly depending on payment for a single shipment to remain viable.

Australia’s largest export is iron ore making it the world’s leading exporter at 58%. China leads the world for iron ore imports at 57.1 billion per year. The trend to export into markets subject to lacking infrastructure and alien regulations only serves to aggravate the risks. With prices of livestock flat lining globally, Asian markets represent an opportunity for growth as well. The danger to stable import and export licenses is historically high in this region. Ever changing regulations, politically motivated or genuine, also represent instability for exporters.

Export trade represents opportunities for growth in an ever more competitive global market. Failing to factor the risk has cost many companies more than they could afford. If you export to companies without letters of credit, we suggest you make a call to NTC as soon as possible to discuss a policy that is right for you. ECI does more than mitigate the risks associated with nonpayment, refusals and other threats to your accounts receivables. It is also a powerful sales tool helping to instill confidence in potential foreign trading partners. Additionally, ECI is often a prerequisite when seeking financing for export operations and related infrastructure. The key is to balance the risk and the cost expertly. Varying levels and types of specific coverage to successfully mitigate risk but remain highly profitable is a challenge we at NTC pride ourselves in meeting. The goal is to offer the minimum cost for the greatest risk mitigation.

The need and utilisation of export credit insurance brokers is becoming more relevant each day. Policyholders for credit insurance are projected to grow in 2018 by 3.2%. Some of the reasons for the increased use of this product are clear;

  • It allows for competitive new account terms despite the risk of nonpayment by foreign buyers.
  • Reduced risk of non-payments equates to increased sales and market opportunity in volatile regions.
  • ECI can increase borrowing and lending capabilities for exporters doing business in foreign and emerging markets.

If you are an exporter the opportunities can be lucrative and numerous. Yet, the risk also increases with your export exposure. Our professionals advise exporters to keep the following checklist in mind to mitigate that risk;

  • Define the areas where you incur export risk.
  • Develop a risk management matrix by listing the risks and management strategies.
  • Discuss your risks and strategies with colleagues, financiers and NTC.
  • Review your export risk management profile regularly.

Export Credit Insurance by Niche TC

NTC is waiting to find the policy right for you. We consider many factors when proposing ECI. Our goal is to offer the best policy for your situation. These can vary by term length, risk, experience level of the exporter and more. The cost associated with ECI is often less than the price to secure letters of credit. Contact us today and we will work hard to craft the policy that best fits your business.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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Trade Credit Insurance Vs. Export Insurance

Whether you are an importer or exporter, or you commonly provide goods and services to companies in foreign countries where political risks and other issues may present risks to your cash flow, proper insurance is critical for risk management.

If you work with a company and they fail to pay on your stated credit terms – like net 30 days – the impact to your accounts receivable and cash flow can be devastating, particularly for smaller firms. That’s why you need to protect your credit portfolio from bad debts.

But you may not be sure what type of insurance is right for you. Is export insurance what you need? What about trade credit insurance? In this article, we’ll explain everything you need to know.

Export Insurance & Trade Credit Insurance Are The Same Thing

While this may be confusing, it’s true. Trade credit insurance and export insurance are just two terms that insurance companies use for the same product.

Why are there two names for trade credit insurance? Mostly due to regional differences. Insurers in many different countries offer this type of policy, so it’s only natural that there would be a few terms used to mean the same thing.

Both types of insurance work the same way. Export insurance, like trade credit insurance, protects your company from bad debt and protracted default. You insure your accounts receivable with a policy, and then if a company does fail to pay, your insurance company will attempt to recover your money with a debt collection service.

If it is not possible to recover funds within a specified period of time – such as 6 months – you’ll be compensated by your insurance company, and you’ll receive between 70-95% of the value of the unpaid invoice, based on the terms of your policy.

Typically, you’ll need to implement some credit control terms when you get a trade credit insurance policy, and do things like implement a credit limit for each customer. This helps reduce risk, both for you and your insurer.

Why Should I Get An Insurance Policy?

So, why should you think about getting a trade credit insurance/export insurance policy? Here are just a few of the reasons that companies which sell to international buyers invest in coverage from an insurance company.

1. Safeguard cash flow – Trade credit insurance allows you to get compensation even if your customers don’t pay, which helps preserve your capital and cash flow, even during protracted default.

2. Sell to new customers – With trade credit insurance, you can sell to new customers in different countries while minimizing your risk, and you do not have to deal with cash settlements, and can instead extend standard credit terms, like Net 30 days.

3. Costs of recovering debt are covered – Your insurer will always try to recover debt from a non complying company before issuing compensation, and the costs of attempting to recover debt are included in your policy.

Learn More About Trade Credit Today!

If you would like to increase your market knowledge and get more information about credit management and trade credit / export credit insurance, contact Niche Trade Credit right away. As a leading trade credit insurance broker in Australia, we can tell you everything that you need to know.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What is Structured Trade Credit Insurance?

With business failures on the rise, disruptions to your company’s cash flow can be devastating. If you’re in a market within the structured trade finance arena, it’s crucial that you’re able to reduce your risks and manage your cash flow. Structured trade credit insurance can protect your business from volatility and enable you to reach your goals. At Niche Trade Credit, we’ve been protecting our clients from debt and commercial risks with tailored, specific credit insurance policies. What is structured trade credit, and how can it accelerate your business growth? We’ll explore below.

What is structured trade finance?

Structured trade finance is a product that is primarily used in the commodities sector.

  • Traders
  • Producers
  • Processors
  • Industrial end-users

Structured trade finance is considered a specialised activity, and is dedicated to the financing of high-value commodity flows. Transactions are typically cross-border. Techniques between traders, producers, processors, and end users include the following:

  • Warehouse financing
  • Pre-export
  • Tolling and processing
  • Borrowing base financing
  • Reserve based lending

Financing agreements are tailored to the needs of each client. Repayment of a structured trade financing transaction is made through the sale or the export proceeds of the commodity. It can be used to finance short-term or long-term capital expenditure for up to five years.

Markets within the structured trade finance arena include industries such as mining, energy, and also soft commodities. While businesses in any sector are at financial risk, borrowers of structured commodity finance tend to be less creditworthy than in other sectors. The reason that this form of trade finance is structured is that lenders will mitigate payment defaults by structuring payment terms between end buyers and lenders directly. As collateral, the lender will use letters of credit, shipping documents, and the commodities themselves.

Structured trade finance transactions are either pre-export or pre-payment. In a pre-export finance transaction, the buyer will enter into an export contract with the seller for the delivery of the commodity. A bank will provide a loan to the seller. The buyer will pay for the commodity to be delivered into a collection account. The collection account is released to the buyer through the bank after all agreed upon terms are met.

How does structured trade credit insurance work?

This policy and risk management product would cover the payment risks associated with the delivery of goods and services. Trade credit insurance will usually include a portfolio of buyers, and the policy pays an agreed percentage of a receivable or an invoice that is unpaid because of insolvency, bankruptcy, or a protracted default.

Businesses that purchase a structured trade credit insurance policy ensure that their accounts receivable is protected from loss due to nonpayment of a valid debt held by their debtors. Also, policies can cover losses that result from political risks, such as currency instability, a financial crisis, or war.

What are the benefits of this policy?

  • A policy transfers payment risks to the insurers. Their diversification of risk, financial strength, and expertise of the credit market make them more suitable to assume such risks.
  • Gives suppliers access to professional credit risk expertise.
  • Protects suppliers from liquidity shortages or insolvency from non-payment.
  • Insurance protects a significant portion of a supplier’s asset portfolio from loss.
  • Enables suppliers to extend credit to their customers instead of requiring an advanced payment, payment upon delivery, or secure letters of credit. This gives the supplier a way to compete in the global marketplace where buyers only use credit to purchase commodities.
  • Gives suppliers better access to improved lending terms from certain lending institutions, many of which will only provide financing if a supplier has an insurance policy.
  • Allows suppliers to cut out wholesalers and auction houses because they can accept direct buyer risk.

We’ve been working with numerous insurers in Australia for years, and we take pride in offering our clients excellent credit management services in the Sydney area. With our intimate knowledge of credit insurance policies, we’ll find the best coverage for your business.

With a structured trade credit insurance policy, you’ll protect your business from volatility and insolvency and increase your competitive edge in the global marketplace. Contact Niche TC today and see what our high-quality credit insurance services we can get for you.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Happens To Business Debt When A Company Is Sold

If you sell your goods and services on credit terms like Net 30 or Net 60, you may be wondering what happens to your accounts receivable and business debt when one of your customers sells their company.

Selling goods on Net 30 or Net 60 terms can be great for your cash flow, but it may pose some issues if a business is sold, and they still owe you money. A business sale can have some major ramifications when it comes to recovering debts for your small business.

In this guide from Niche Trade Credit, we’ll discuss the basics of what happens to the debt during a business sale.

Understanding The Two Most Common Types Of Business Sale & What They Mean

There are two common types of business sale in Australia, as follows:

  • Stock sale – Stock sales are usually used for larger firms in Australia, as they can be quite time-consuming and costly. In this method of sale, the purchaser will buy all of the assets and liabilities of the business. If a business sold in a stock sale owes you money, the new owner will still owe you that business debt.
  • Asset sale – An asset sale involves the transfer of specific assets and liabilities between a buyer and seller. Some assets and liabilities may be transferred, while others may not be. As you may be able to tell, this can make it very confusing when determining who owes you money.

It’s usually a good idea to try to recover outstanding liabilities and business debts before a company is sold – as it can be more complicated to try to do so after a sale.

How To Protect Your Business When A Customer Is Selling Their Company

When a customer is selling their company, you are personally liable for ensuring that you recover the debts that you’re owed. Here are a few

  • Stay aware of each customer’s status – Make sure that you know how your customers are doing, and keep an eye out for any information that may indicate they are selling their business.
  • Stop extending credit until the business is sold – If the business can afford to pay upfront, it’s best to stop extending them credit until it is sold. This will help avoid complications when trying to collect on business debts.
  • Be proactive about recovering outstanding invoices – If the customer owes you money, be proactive about communicating with the current owner and the new owner of the business.
  • Hire a debt collection service – If you don’t want to take legal action, you can hire a debt collection service to collect your debts, which makes it easier to recover what you’re owed.

Note, also, that if a company becomes insolvent and is not sold, it may also be hard to recover your debts from the business owners. Other creditors, such as lenders with personal guarantees, may have first claim to their business assets during insolvency. The Australian Tax Office may also collect unpaid payroll tax or other taxes during liquidation.

Trade credit insurance can help with insolvency, and also protect you if a company is sold and refuses to pay for past business debts. If a company in Australia or in another country goes bankrupt or becomes insolvent, your insurance policy will compensate you for a percentage of their outstanding debts.

Know How To Protect Your Company From Bad Debt When A Business Is Sold!

If a business is sold – particularly when it’s in financial trouble – it can be hard to recover the money you’re owed if you have been selling on credit. To protect yourself from this situation, you can follow the above tips.

You can also work with Niche Trade Credit to get credit insurance solutions that can protect your accounts receivable – or even hire us to help with debt collection and recovery. To learn more about your options and how to protect yourself, just contact Niche Trade Credit now.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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Trade Credit Vs. Trade Finance: What’s The Difference?

If you’re working in the world of export finance, you may be wondering what the difference is between trade financing and trade credit – and what the advantages are of using trade credit rather than other trade finance options.

In this article, we’ll explore the definitions of trade credit and trade finance, and why trade credit is often the best way for smaller-scale importers/exporters to do business. Let’s get started.

Trade Credit Is A Subset Of Trade Finance

The first thing that you need to understand is that trade credit is not separate from trade finance. Rather, it’s a type of trade finance. The term “Trade Finance” refers to the innumerable ways that trade, both foreign and domestic, is accomplished by importers, exporters and other businesses.

Trade credit refers to the extension of short term credit to the exporter, or to the importer of goods, or any transaction where buyers and sellers extend short term credit lines to one another. It’s essentially a short term loan that’s interest free and does not involve any financial institutions, provided by whoever is selling their goods and services.

The common “Net 30” and “Net 60” invoice terms are a good example of this. Once the goods shipped and you’ve created a bill of lading, you can invoice your customer. Then, you can give an exporter time to pay for the goods they want to buy and export, on the basis of payment in 30 or 60 days, with a 2% discount if they pay within 30 days. This type of trade financing helps improve cash flow and working capital.

The buyer has the option to pay right away and save, or to wait, if they need to acquire more funds to complete the purchase. This flexibility makes trade credit an important part of the global supply chain, and the basis for most international trade transactions.

These transactions usually involve working with a credit agency to determine a potential buyer’s credit worthiness. If you’re an exporter, for example, and cannot determine a potential customer’s credit risk, you may ask the importer’s bank or the importer to prepay for the first several shipments of goods when they open an account with your company. Then, as they show the ability to pay on time, you may extend them a longer credit line.

Other Finance Options

Trade finance includes trade credit, but also a variety of other different ways by which an international or domestic trade transaction can be funded, such as:

  • Letters of credit – A letter of credit is a document issued by a bank or another financial institution, and given to a product seller, on behalf of the buyer, guaranteeing payment. If the buyer does not pay, the bank does – and the buyer owes the full balance of payment to the bank.
  • Bank guarantees – A bank guarantee is similar to a letter of credit. It guarantees that, in the event that either a buyer or a seller cannot fulfill their end of the bargain, the bank will pay the required dues, which helps defray risk.
  • Cash With Order (CWO) – In this method of trade, the buyer of any item or items simply pre-pays for their order with cash, at the time of purchase. This is a common transaction method between companies who do not yet have a business relationship.
  • Cash On Delivery (COD) – With COD, the buyer pays upon receipt of the items. This is rather rare in modern trade, for obvious reasons – the buyer could refuse to pay, not have the funds, and so on.

The Importance Of Insurance For Trade Credit Transactions

Compared to other methods of trade finance, trade credit is very simple and flexible. Giving a client an open line of credit makes routine transactions much easier – but without trade credit insurance, you could be exposing yourself to risk.

Essentially, trade credit insurance is a way to defray the risk of giving a company a line of credit. It’s a policy that guarantees that, in the event of protracted default or bankruptcy, your insured accounts receivable will be paid out, based on the compensation schedule laid out in your policy.

This way, even if your clients fail to pay for a shipment or for their goods, you can ensure that your cash flow and your profitability are protected – and that your company can continue to grow. Because of this, trade credit insurance is a very important part way to protect your company.

Learn More About Trade Finance & Trade Credit From Niche TC!

With over 15 years as a trade credit insurance broker, the team at Niche Trade Credit has seen and done it all. If you’ve got any further questions, we can help you gain a better understanding of trade finance and credit insurance solutions. Contact us online now to set up an appointment.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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Difference Between Export Credit Insurance Vs. A Letter Of Credit

If you work in the world of exporting and international trade, and you are looking to safeguard goods shipped overseas to your buyers, you may be wondering if you should use a letter of credit, or export credit insurance.

Both of these methods can help minimize payment risks, and ensure that you are paid on time, based on the terms and conditions that you have signed with your foreign trade partner. So, what are the differences – and which one is right for you?

Find out by reading this article. We’ll discuss what you need to know, and how to choose between these two financial products, and ensure that your accounts receivable are safe from bad debt and default. Let’s get into it now.

What Is Export Credit Insurance? How Does It Work?

This is a specialised form of insurance that is typically used in international trade to protect accounts receivable when you extend trade credit to another party.

That is, trade credit insurance is intended to ensure that any invoice you send out to a customer will be paid, even if the customer defaults on the payment, or enters bankruptcy. Depending on your policy, you may be able to insure a single invoice or a single customer, or take out a policy that covers your entire accounts receivable.

The way that export insurance works is simple. If you deliver a shipment, goods, or services to a customer, and they do not pay due to bankruptcy, stop responding to you, or they default on their payment for any other reason, your insurance company will compensate you, up to the limits set by your policy.

You will usually receive between 85-100% of the value of the transaction from your export insurance policy. This ensures that, even if a sale does fall through and you are not paid by the buyer, your cash flow will not be affected, and your business can simply continue operation.

One thing to note is that most export credit insurance policies do have discretionary limits in place, which limit the size of your transactions. Transactions over a certain value must be approved by your insurer, via credit checks, and other checks to verify the legitimacy of a buyer.

What Is An Export Letter Of Credit?

An export letter of credit is another very popular way to safeguard your cash flow and ensure that you are paid by a buyer when your goods or services are delivered. Unlike credit insurance, export letters of credit are issued by banks.

A letter of credit is, essentially, a commitment by a bank to pay your company (the exporter), on behalf of the foreign buyer (the importer). When properly drafted, it is an extremely secure document.

Essentially, the document states that, provided that all of the terms and conditions stated are met (on-time delivery, quality of goods, etc.) the bank guarantees payment by the importer.

These documents are often issued by foreign banks, and can be “confirmed” by an Australian bank. Confirmation means that the letter of credit is not just backed up by the original bank – but also by the Australian bank.

The most common form is called an “irrevocable” letter of credit. This means that, unless both parties agree to a change, the document cannot be changed in any way. Revocable letters of credit may be changed, unilaterally, by either party – so they are much less useful as a legally-binding document.

Once issued, the letter of credit will be “called” as soon as your credit terms are met. For example, if your goods are delivered on “Net 30” terms, and must be paid for 30 days after delivery, the issuing bank will draw and send the funds to you exactly 30 days after the delivery of goods. This ensures that you receive payment in a timely manner.

What’s Right For Me? Export Credit Insurance, Or A Letter Of Credit?

This depends on a number of factors. For a larger transaction with a new customer, a letter of credit can be a good way to develop a business relationship – and make sure you get paid on time by their bank. However, letters of credit can be complex and expensive, and in markets and countries where banking institutions are not always the most reliable,  they may not be enough to guarantee payment.

Export credit insurance, however, will cover your costs for any default or bankruptcy on the part of your client. One benefit of this type of insurance is that, unlike a letter of credit, you don’t need the buyer to be involved in the process of developing and signing – meaning that you don’t need their consent. You can always insure your invoice, regardless of whether or not your customer is willing to sign a letter of credit.

To learn more, we recommend that you contact the team at Niche TC. We can clear up any other questions you may have, and ensure that you get the protection you need with our credit insurance solutions.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Is A Trade Credit Insurance Discretionary Limit?

If you’re interested in protecting your accounts receivable and engaging in risk management for your company, to protect yourself from bad debt, political risks, or other issues with an export transaction, you may be interested in trade credit insurance from a large insurance group.

Credit insurance services protect your cash flow and profitability if a customer who buys goods or services fails to pay due to protracted default or bankruptcy. If this happens, your insurance company steps in, and compensates you for this loss.

One of the terms you may have seen while trying to decide if a product from an insurance company is “discretionary credit limit.” If you’re wondering what this means, read on, and find out.

Understanding Trade Insurance Discretionary Limits

Unless you choose to insure a single invoice or customer, most insurance companies will insure all of your invoices and accounts receivable, with the fee calculated as a percentage of the total outstanding debt. This figure is also affected by the creditworthiness of each client.

Using credit control management tools and internal credit management processes, your insurance company will likely set what’s known as a “discretionary credit limit,” which will be outlined in your insurance product disclosure statement.

This limit is the maximum amount of business that you can do with any single buyer, without the formal approval of the insurer, and it’s also subject to the obtaining of satisfactory credit references.

In essence, a trade insurance discretionary limit is meant to make sure that you do not issue lines of credit to larger debtors, over an amount agreed upon in your insurance contract, without first consulting with the insurance company.

To boil it down into simple English, any transaction that is made over your discretionary limit – and without consulting your insurance provider for credit approval – may not be covered under your trade credit insurance policy.

What’s The Purpose Of A Trade Insurance Discretionary Limit?

Your insurance company has only agreed to take on a certain amount of risk for your accounts receivable – based on factors like your average transaction value, the countries in which you operate, and your percentage of coverage.

Because of this, their business could be endangered if a company starts issuing large lines of credit to companies which could be risky, or do not have a history of timely payment.

The trade insurance discretionary limit is meant to help mitigate that risk, by setting forth guidelines about how much credit a vendor or exporter can issue, without the express approval of their insurer.

What If I Need To Exceed My Trade Insurance Discretionary Limits?

As your company continues to grow, you’re likely to have issues with your discretionary limit, as your sales volumes get larger. But these are easily solved.

When a large transaction must occur, you simply must contact your insurance company to approve the invoice and the transaction, based on your customers’ creditworthiness.

In addition, as your company grows, your insurance company may choose to expand your discretionary limit, particularly if you have not had to file any claims recently. This gives you more business flexibility.

Got More Questions About Discretionary Limits? We Can Help!

We understand that navigating the world of trade credit insurance isn’t always easy. But at Niche Trade Credit, we’ve been experts in the field for more than 30 years. We can clear up any other questions you have about discretionary limits, and help you find the right trade credit insurance policy for your business. Contact us today to learn more!

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.

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What Is Credit Risk Exposure

To understand what credit risk exposure is, we first need to understand exactly what credit risk itself is. Credit risk is the risk posed to a company if a third party client they loan to does not honor an agreement, usually the repayment of money. Credit risk exposure is the total and maximum amount of money you could lose if all your third party clients fail to honor their payment agreements. This credit exposure is often calculated in relation to specific types of agreements such as repayment loans or long-term contracts.

Understanding your credit exposure is part of risk management for your business. Once you have conducted an audit on your core operations and identified your default risk, you are able to take steps to ensure the security of your company and reduce your credit risk exposure.

Client Selection

Careful client selection is the first step in monitoring and reducing credit exposure risk. It is important to limit and lower your risk by conducting a credit analysis on potential clients prior to selection. Look for clients with higher credit ratings as they will be more likely to uphold their agreement and repay the loan. This does not mean that you should not take on clients with low or no credit rating, rather use this information to tailor the loan agreements you offer to them.

Controlling Credit Exposure

Controlling your credit risk exposure is critical, especially now in such uncertain economic times. A common way to reduce risk is to introduce penalties and new loans with a higher interest rate. These measures aim to deter clients from missing a payment and mitigate the loss that may arise from a potential missed payment. This particular method is often utilised by banks, however there are a number of other ways lenders can control their risk exposure.

Setting credit card limits or altering the principle and interest amount based on the clients expected likelihood to repay the sum owed is another example of this. This may take form by offering a reduced loan to a student with no credit history, or offering a high value loan to a client with an excellent credit rating. Utilising this method will enable you to reduce your credit exposure risk by lowering individual credit risk of certain clients.

Purpose of Credit Insurance

Some risk is inevitable, that’s just the name of the game when it comes to business. Recent months have shown just how unpredictable the economy can be with many businesses falling victim to the devastating effects of the Coronavirus. It is more important than ever to ensure your business is protected against the unknown.

Studies have shown that the majority of business failures are not due to lack of sales or opportunity, rather due to poorly managed cash flows and increased credit risk. Many business owners have found themselves ignoring cash flow and credit risk in favour of focussing on revenue and sales. While this problem may directly affect your clients, it will indirectly affect your business if you do not have adequate measures in place to protect yourself from credit default.

Credit insurance is the best and safest way to ensure your business is protected against concentration risk and counterparty credit risk. Your business may also be exposed to commercial risks such as if your clients are unable to pay within the agreed time frame, or become insolvent. In these cases your insurance will cover things such as the standard services or goods that are sold.

Credit insurance plans are customisable and can be tailored to meet the specific needs of your business including risks such as binding contracts and works in progress. Credit insurance is vital for businesses of any size to help protect their cash flow and ensure the business is able to continue trading with no issues.

Get Serious About Protecting Your Business

Niche Trade Credit has over 30 years experience in credit management and credit insurance services. If you are serious about protecting and growing your business, contact us today on 02 9416 0670.

*DISCLAIMER: No person should rely on the contents of this publication without first obtaining advice from a qualified professional person. This publications sold on the terms and understanding that (1) the authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication; and (2) the publisher is not engaged in rendering legal, accounting, professional or other advice or services. The publisher, and the authors, consultants and editors, expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything, done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole or any part of the contents of this publication. Without limiting the generality of the above, no author, consultant or editor shall have any responsibility for any act or omission of any other author, consultant or editor.