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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 Experts Think

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 Trade Credit. We can clear up any other questions you may have, and ensure that you get the protection you need, either with a letter of credit, or a trade credit insurance policy.

*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.