If you want to minimise your credit risk when extending lines of credit to your customers, export credit insurance – also called trade credit insurance – is a great option. And covers your overall level of risk – from bad debts to risk to non payment these are described in your credit terms.
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 these questions 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.
Top4