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Three Reasons to Have Trade Credit Insurance

Niche Trade Credit (NTC) knows that trading goods and services on credit is always associated with risk. Trade credit insurance can protect your accounts receivable from taking a hit when a client is unable to pay. The most common types of credit risks covered are;

  • Protracted Default
  • Insolvency
  • Liquidation

As part of a comprehensive credit portfolio, we at NTC offer policies that protect your cash flow and working capital. Spending time tied up with debt collections services is not only time that could be better utilized but doesn’t guarantee prompt payment. We know the value of risk management and the danger even one failed remittance can represent, especially for a new enterprise. Trade credit insurance policies can be combined with political risk insurance representing a powerful means to mitigate the potential fallout.

Protracted Default

If you’re considering expanding credit to existing customers, entering into emerging markets or other beneficial arrangements leveraging credit, you may need trade credit insurance. During the financial crisis of 2008, the number of credit defaults hit an all-time high globally. Companies that find themselves in financial hardship will typically first look to “squeeze” their vendors hoping to get by. Payments for raw materials are often made late or not at all when a company is facing limited cash flow.

The economy is cyclic. Most economists and pundits believe we are overdue for another recession. Companies who hold a few key customers, (less than 10 that make up a majority of their sales) are at greatest risk. If and when another recession comes, credit will falter. Customers that normally pay on time may see extending their obligations as a way to help themselves at your expense.

Insolvency

We at NTC know you investigate customers in order to avoid bad debts. Even the most astute analysis is based on limited information. This is especially true for international customers and those in emerging markets. Predicting future insolvency is a difficult proposition. It typically precedes liquidation (bankruptcy) and often finds the company going through voluntary liquidation, administration, or receivership.

During an insolvency, the company in question will typically try to negotiate with creditors for reduced payments and other arrangements to avoid liquidation. In Australia, this often takes the form of a deed of company arrangement (DOCA). The process is similar in many other nations as it is so common.

Usually companies do not fail overnight. The warning signs and process can take many years to finally end with a successful restructuring or a liquidation. Trade credit insurance removes your company from this danger and the complications that go with negotiating for payment or fighting other legal devices that can ultimately in debt you to your debtor.

Liquidation

Global bankruptcy, liquidation in the business context for Australia, is on track for a 3% rise in 2018. The legal protections afforded by this process make payments for good and services highly unlikely. Trade credit insurance is specifically designed to protect your company from this event. It often comes with little or no warning. Managers and directors will not wish to advertise this potentially panic inducing information. Publicly traded companies are more transparent by virtue of their structure but their proportion to privately held interests is in decline. Since 2013 roughly two thousand publicly traded companies have disappeared serving to widen the disparity.

Liquidation has been cited as the most common reason for nonpayment to credit holding vendors. In addition to the risk of nonpayment, a vendor might find themselves defending against a preference claim. In this scenario, payments or transfers of assets made prior to the liquidation of the customer are called into question. In these cases the claim is levied against your business essentially alleging money is owed to another creditor. The argument is that the other creditor should have been paid before you were. In other words, the creditor asserting the claim has, “preference” to your claim against the liquidated company.

Trade credit insurance is one of the oldest and most well-structured forms of insurance available today. It was originally developed in 19th century Europe to promote trade with other nations. Ensuring payment can not only provide security, but may also serve to convince potential investors to collaborate with you.

Crafting policies is essentially a risk assessment. Our specialists will factor the relative risk represented by your customers and tailor a product that is right for you. Whether your business is large, small, international or domestic, we can optimize your trade credit policy. NTC premiums and benefits are calculated as a percentage of risk and represent the best value for the services offered.

*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 Experts Think

3 Reasons for Political Risk Insurance

If you’re a multinational, exporter or otherwise doing business in emerging markets outside of Australian jurisdiction, political instability can weigh heavily on your chances of continued success. Even if you haven’t considered the angle, private insurance companies such as Niche Trade Credit (NTC) offer varying political risk insurance policies. Packages hedge against the financial losses incurred because of government actions such as protectionist measures, currency fluctuation, expropriation and more.

The risk of doing business in another country is a concern for potential investors as well. Securing outside investment will often depend on the availability of political risk insurance. Niche Trade Credit offers political risk insurance addressing these issues in a strategic way. Using the latest geopolitical analysis and statistical modeling, policies crafted offer the greatest value for your investment.

Protectionism

Nationalism is on the rise across the globe. Talk of tariffs, change in import/export requirements among other actions taken by foreign governments can mean the difference between a profitable arrangement and a bust. Your company might manufacture a product representing years and millions of dollars invested, only to find that a recently imposed tariff will eat up the margin.

Blue Scope Steel exports aluminum and steel to the United States. The recent 25% tariffs imposed by the Trump Administration were cause for concern but luckily, Australia was able to secure an exemption. News of the special arrangement saw a rise of 3% in Blue Scope’s share price. Political risk insurance takes the uncertainty out of the equation. Sooner or later, the odds turn against companies large and small. Aluminum and steel exports to the U.S. may be relatively low, but consider the risk across the spectrum of the 230 billion in Australian exports for 2017, and the case for hedging political risk becomes clear.

Currency Fluctuation

Natural and manipulated changes occur affecting the relative value of national currencies daily. Emerging markets are especially volatile. Today, the Australian dollar might be steady against the national currency where your interests are represented. Central bank interventions due to government policy and instability can rapidly invert an exchange rate. The ability to convert currencies for repatriation is also at risk in developing nations. NTC can tailor a package that’s right for these situations, shielding you from the complex risks that currency can represent.

Expropriation

Historically, expropriation was more narrowly defined. Today, it can take the form of less overt actions preventing a business from conducting itself internationally. Regulatory changes, tax reforms and other legal changes can also indirectly create circumstances that make operation untenable. The risk of direct seizure of assets, forced closures and transfers of ownership are no longer the only avenues for unscrupulous regimes to target successful companies and gain advantage.

Infrastructure developers and sovereign lenders may represent the highest form of political risk taking, especially for banks and financial institutions. Foreign government insolvency is a real possibility. The vast majority of sovereign nations are running under budget deficits. Australia is on relatively solid ground at -1.7% of GDP. The trend for higher debt is increasing across the board. Some economists are pointing to sovereign insolvency as a possible cause for the next global economic crisis. Government funded infrastructure often takes years to plan, execute and finalize. Competitively bidding on this moving target is risk enough. In the time it takes to complete a project, governments can change and circumstances can become unfavorable. Committing to a long-term infrastructure improvement without political risk insurance is an invitation for trouble.

Higher levels of risk come with more opportunity for profits. Underwriting the risk only makes good business sense and our specialists, at NTC, are ready to help. The circumstances between nations and types of business transacted call for a personalized approach. Working closely with our clients to develop the best possible insurance against political risk is why your next choice should be NTC.

*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 Experts Think

What is Trade Credit Insurance and Why Should You Care?

Companies offering credit to customers expand their market substantially. The time afforded to customers, through credit management, to pay for goods and services has benefits for both parties. The vendor often benefits from increased purchasing and more regularity of orders placed. The customer benefits from expanded credit terms and increased cash flow. In some nations, it is customary for regular vendors and customers to exchange credit memos, as they are more cost effective, simplify exchanging currency and circumvent tax deductibles and liabilities.

The downside is found in the credit risks associated with these practices. If non-payment occurs, the vendor is left absorbing bad debts and working with collection services seeking remuneration. Credit risk is mainly shouldered by the vendor but there are ways to mitigate this risk.  The simplest risk management strategies are internal and include good research, consulting credit ratings and building a strong relationship with customers. Yet, even the best strategy will fall short in time.

Credit insurance (CI) and trade credit insurance (TCI) are often used interchangeably. Where TCI focuses on international credit, CI is more domestically optimized. The challenges in doing business outside of Australia are complex and seeking legal remedy is often infeasible. TCI offers protection for a wide variety of situations and can be tailored to your specific needs. It can include political risk, import/export risk and others. In addition to foreign trade, domestic customers are equally capable of not paying their debts. Our credit insurance is tailor made for your customer portfolio as levels of coverage, premiums and benefits can be adjusted to your comfort level.

Why Should You Care?

Do you offer credit to your customers beyond the standard payment terms? Perhaps you have a regular customer with several million dollars in payables owed to your company. It’s more common than many would realize but what happens when that customer is unable to pay? The answer largely depends on whether or not you’re insured.

Even though the benefits for securing policies have been described and are well known, many companies choose to remain uninsured. Accounts receivable, for the majority of companies, represents 40% of their total value. A study from 2016 found that Australian businesses are the worst at paying bills on time. The study concluded that 72.5% of invoices are paid late. They also found that;

  • 19 billion is tied up beyond the customary 30-day payment period and considered late.
  • 90% of small business failures are caused by poor cash flow.
  • The average bill is paid 23 days late, if at all.
  • 62% of businesses who failed due to poor cash flow attributed their failure to one customer.
  • 1 in 10 invoices are never paid.

These observations are in line with other statistics that show small and medium sized (<150 employees) businesses are vastly underrepresented in the Australian credit insurance markets. The perceived complexity and cost for policies has been a major barrier for small business participation. Unfortunately, it is more often the small business that is more at risk from defaults, non-payments, rejections and political factors. Larger well-established corporations might be better suited to absorb the loss but are still missing out on the opportunity to protect themselves from bad debts if left uninsured.

Automation and the digital nature of emerging services offered by private insurers are expected to drive growth in the coming years, especially for small business participation. The variety of foreign and domestic trades that occur has created a responsive industry that can tailor policies to suit most any requirements, large or small.

At Niche Trade Credit (NTC) we understand the value in making relationships with our clients. We encourage large and small businesses to seek us out and insure their trade credit.  Our experts can more clearly define the types of coverage offered, levels of coverage and how these issues apply to your unique situation. Don’t fall victim to poor cash flow as 90% of small business have in the past. For a fraction of the cost of one delinquent invoice, you could be covered too.

*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.