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What Experts Think

How Much Does Export Credit Insurance Cost?

If you want to minimize your credit risk and bad debts when extending lines of credit to your customers, export credit insurance – also called trade credit insurance – is a great option.

Export credit insurance protects you from protracted default when foreign buyers fail to pay for your product or services, and helps cover the cost of debt collection when your buyers do not pay. If you cannot recover your funds from a single buyer, your insurance company will repay you, and cover the cost of the unpaid invoice.

So, how much can you expect to pay insurance companies if you want to protect yourself when conducting international trade? Let’s explore this subject in detail below.

Understanding The Average Cost Of Export Credit Insurance

As a rule, this type of risk insurance is calculated as a percentage of your overall invoices/accounts receivable. Currently, short term export credit insurance rates are usually hovering around 0.1-0.3 cents per dollar.

In other words, if your company has a total annual revenue of around $50 million AUD, you could expect to pay somewhere between $30k-$100k in insurance premiums to cover your accounts receivable.

This is just a rule of thumb, of course. Depending on your credit terms, the countries in which you operate, and other factors, the cost can vary.

What Affects My Export Credit Insurance Rates?

Many different factors can influence the cost of your export credit insurance policy. Here are a few of the most common such factors.

Total cash flow and outstanding invoices – The more credit you’re extending, the more your policy will cost. This is particularly true if you mostly extend credit to a handful of companies, and have high credit limits for each company.

Countries of operation – Companies working in developed countries, like America or Australia, face fewer political risks, compared to those mainly exporting to the developing world, and this can affect the cost of export credit insurance.

Creditworthiness of clients – Your insurance company will conduct due diligence on all of your clients, to ensure that they are likely to pay their invoices. Companies that have poor credit management and have defaulted or failed to pay in a timely manner in the past could increase the cost of your policy.

Percentage of compensation – This refers to how much of the value of an invoice you are eligible to recover when a client defaults. If your percentage of compensation is 70%, for example, you’ll get 70% of the value of the invoice from your insurer in case of nonpayment. A policy covering a higher percentage – 95%, for example – will be correspondingly more expensive.

How Can I Find The Best Rate For Export Credit Insurance?

The best way to find a great rate for export credit insurance is to shop around – there are many different trade credit/export credit insurance companies working in Australia, and you may be able to save money by comparing their rates.

Need help? Contact Niche TC now! As a leading Australian trade credit broker, we can help you compare policies from different insurance companies, and choose the one that’s right for you. Get started today, and get more information from our experts.

*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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Understanding The Relationship Between Trade Credit and Factoring

If you run a small business, and you’re interested in learning more about trade finance, you’re in the right place. In this article, Niche Trade Credit will take a deep look at two of the most common financial tools used by small businesses, especially those involved with importing, exporting, and global trade: trade credit and invoice factoring.  Let’s get started, discuss these two financial instruments, and talk about how they relate to one another in the world of international trade.

The Basics Of Trade Credit – Credit Extended Between Two Partner Companies

Trade credit is one of the most simple forms of credit in use today, and is typically extended from one merchant or supplier to another partner company. Essentially, it is a business-to-business (B2B) agreement, in which a customer can purchase goods that they need for their business on an account – without paying cash up front, and paying the supplier at a later date.

The commonly known “Net 30” agreement, when a customer has 30 days after the purchase of goods to pay for their delivery, is a form of trade credit. In some industries, 60 or 90 day terms are more common, which allow for increased flexibility.

So, to boil it down, trade credit is the credit that one company extends to another for the purchase of goods and services. Why is this done? It has a few benefits for both parties.

The party issuing the credit may incentivize the partner company by offering them favorable repayment terms if they pay within a certain time. For example, they may get a 2% discount on a Net 90 contract if they pay within 30 days, and a 1% discount if they pay within 60 days. This encourages companies who can pay right away to do so as soon as they can.

The other benefit – for both parties – is that it increases business flexibility, and helps encourage short-term growth. The company purchasing the goods has more time to sell them and recoup the money necessary to pay. If cash flow is good and business is booming, they can pay early and save money – or wait, if things are slowing down and they need more time.

Because of this, the company issuing the credit is able to profit from a relationship with a new customer, while the company to which credit is extended is able to benefit from better cash flow, and a more flexible repayment strategy.

One important thing to note about trade credit is that the company offering the credit is vested in the success of the company to which credit is extended – as their continued profitability is usually important to both parties.

Because of this, trade credit contracts are often much more flexible than bank loans or any other type of credit. However, there can still be penalties and fines applied if a creditor does not repay the line of credit by the agreed-upon time.

Understanding Invoice Factoring – Enhance Cash Flow, Get Working Capital

Invoice factoring (also sometimes known as receivables factoring) is a type of debtor financing, used to purchase accounts from a company, in return for a cash lump sum. This can be a good way to get quick cash, even if you have bad debt on your books – like a number of clients who are not paying you in a timely fashion, despite owing you money for exporter receivables, for example.

Essentially, invoice factoring allows you to sell all of your outstanding invoices for a percentage of the face value of the invoice. The factoring company pays you this money immediately, and will pay the remaining percentage – minus applicable fees – when the client pays them. By doing so, you can get cash for the money you’re owed immediately.

What you’re doing when you perform invoice factoring is selling your accounts receivable for immediate payment – and turning over responsibility for payment collection to the factoring company. This lowers the risk of late payment, and shifts the risk of bad debt onto the invoice factoring company. Invoice financing is often used by companies to trade receivables for immediate cash if the business is having cash flow issues.

Another important factor to know about when learning about invoice factoring is the concept of recourse factoring. In most cases, any company offering invoice factoring will use recourse factoring, to protect their company from the risk of non payment and bad debt.

Recourse simply means that there is an understanding between you and the invoice factoring company that you will buy back any receivables for which the factoring company cannot collect payment. In essence, you, the client, are responsible for covering the cost of any invoices that are not paid by your customers.

The vast majority of invoice factoring transactions include this stipulation. Non-recourse factoring is rare, and this type of receivable financing is typically only offered to companies who have clients with an excellent payment history.

In addition, non-recourse factoring is typically more expensive, and it does not necessarily protect your company from the risk of non-payment. This is because most factoring companies who offer non-recourse factoring apply it only in cases of bankruptcy – if the client simply doesn’t pay, or disappears without paying, you must still buy the invoice back from the factoring company.

How Do Trade Credit And Invoice Factoring Relate To One Another?

Trade credit and invoice factoring are deeply linked – because when you sell your accounts receivable, you’re essentially transferring a contract to another party, and receiving a lump sum payment from them for the invoice.

This is a good way that companies who offer long repayment terms for trade credit – 60, 90 days or more – can get more cash for their company’s day-to-day operations, even if most customers are waiting for the maximum period of time to repay.

Learn More From Niche Trade Credit Now!

We’re one of the leading insurance companies in Australia when it comes to credit insurance services – and if you have questions about invoice factoring, trade credit, or any other related subject, we’d be happy to help you learn more. Interested? Contact Niche TC 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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Understanding A Sample Trade Credit Insurance Policy

If you’re thinking about purchasing a trade credit insurance policy, you may have some questions about what’s covered.

If so, you’re in the right place. In this blog, we’ll consider a sample trade credit insurance policy, and discuss the different coverages that are available, what you can expect to pay, and more details.

Sample Coverage For A Trade Credit Insurance Policy

First, let’s discuss what events are actually covered by the trade insurance policy itself. Policies are designed to aid in risk management and ensure you can trade with confidence when extending a line of credit to a buyer, whether in international trade or domestic trade.

This is accomplished by insuring your accounts receivable from bad debts, and ensuring your cash flow remains stable and steady. They will pay out if:

  • A customer or client becomes insolvent, bankrupt, or otherwise is unable to pay
  • A customer or client becomes impossible to contact and does not pay, or a court judgment is issued against them

This helps ensure that you are paid for your goods and services issued on trade credit. Depending on your policy, you may be compensated for between 75-95% of the value of the debt.

In addition, many trade credit policies are also sold with political risk insurance. This type of insurance is similar, but it protects you from political risks such as:

  • The expropriation or seizure of your assets by a foreign government
  • Political violence (war, insurrection, terrorism, etc.)
  • Banking and currency conversion issues or inability to move currency to your country
  • Breach of contract or contract frustration by a government
  • Business interruption

Additional Benefits Granted By This Policy

One of the additional benefits granted by most policies is that, if you need to take legal action against a client who has not paid, these costs will be covered by your insurance policy. The cost of hiring a debt collection service and other related fees may also be covered by your policy.

Limitations Of Coverage

The specific limitations of your policy will vary, based on the policy you purchase. However, it’s important to note that most policies will not cover customer disputes which result in non-payment.

For example, if you deliver a $100,000 order to a customer, and they claim that the items were missing, damaged, or not satisfactory, and they do not pay, you cannot simply turn to your policy for compensation. You must engage in arbitration and negotiations with the customer, and go through the proper legal channels to resolve the dispute.

Trade Credit Discretionary Limits

When you purchase an insurance policy, your insurer will likely give you a discretionary limit. This limit outlines the maximum business credit limit you can issue to a customer without getting approval from your insurer.

In other words, if your discretionary limit is set at $50,000, you cannot sell goods on credit to a company in excess of that limit, unless you contact your insurer, and they perform a credit check and other necessary due diligence checks, and issue their approval for the transaction.

Understanding Premium Costs

Your premium costs are usually calculated as a percentage of your overall revenue. The most common rate is at 0.1 to 0.3 cents per dollar of revenue. So, if your business did $5 million in sales per year, you could expect to pay around $10,000 in insurance premiums.

This will vary based on if your business has a history of collecting bad debt, the companies with which you’re working, the average value of your transactions, and a number of other factors. Your own export credit insurance premium costs could be higher or lower than this number.

Need More Help Understanding Trade Credit Insurance? Contact Us Today!

If you’d like us to provide you with a sample insurance policy and walk you through the coverage you can expect in more detail, contact the team at Niche TC right away.

We can help clear up any questions you have about our trade credit insurance services – and our insurance brokers can help you find the right policy, tailor-made to your particular needs. Get started today, and protect 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.