Trade credit insurance or export credit insurance facilitates export business. Export business, in simple terms, refers to the production of a good or service in one country and its subsequent sale and consumption in another. There has been a boom in the export industry particularly in Singapore following the pandemic according to statistics published in the export guide on the Market Finder website.
Singapore is the 14th largest exporter and the 17th largest importer in the world. Exporting gives a business access to a wider range of customers and enterprises. If a business is carried out only within the country, it may be limiting the overall amount of earnings that could be made from global expansion opportunities.
On the other hand, businesses that are expanding by engaging in exports, selling goods and/or services worldwide, would require financing support to aid with increasing material acquisition, production, and distribution costs. Trade credit is what facilitates businesses in this need.
What is Trade Credit or Export Credit?
Trade credit is a commercial financing that allows a business or customer to buy products or services on credit and pay the supplier at a later date. With trade credit, a business can use trade credit offered by a supplier or offer trade credit to purchasing parties. Therefore trade credit is a mutual agreement between parties where Customers can purchase things on credit, and providers can attract more customers by not requiring payment in advance.
Whilst businesses could benefit from increased profits from trade credit, these benefits could be reaped only if parties agree and stick by the terms and make payment according to the agreed timelines.
The selling of goods and services is subject to a wide range of risks, many of which are beyond the supplier’s control. The failure of a buyer to pay for the goods or services it has purchased is the most serious of these risks, and it can have a drastic impact on a supplier’s profitability. Non-payment of a trade debt or bankruptcy losses can and do happen on a regular basis.
Businesses therefore take a risk of facing bad debts, irrecoverable debts and loss of goodwill as they enter into trade credit agreements. If such risks were mitigated, the rewards to a business from trade credit is significant. Businesses would certainly evolve, grow and profit if there was an option to eliminate or mitigate these risks in trade credit. The good news is that trade credit risks can be eliminated through export credit insurance.
Why is export or trade credit insurance important?
Investopedia describes Trade credit insurance (TCI) as a method for protecting a business against its commercial customers’ inability to pay for products or services, whether because of bankruptcy, insolvency, or political upheaval in countries where the trade partner operates. Hence, Trade credit insurance or Export credit insurance protects businesses from nonpayment of a commercial debt.
Trade credit insurance is sometimes also referred to as debtor insurance, export credit insurance or accounts receivable insurance.
What is the advantage of having a trade credit insurance?
A key benefit of trade credit insurance is that it provides not only peace of mind to the supplier by ensuring that their trade is protected, but it also provides valuable market intelligence on the financial viability of the supplier’s customers, as well as any trading risks unique to those countries in the case of buyers from other countries.
Trade credit insurers will determine the level of cover that can reasonably be provided to the supplier for trade with each individual buyer by analyzing the buyer’s financial status, profitability, liquidity, size, sector, payment behavior, and location, in addition to providing an insurance policy that matches the client’s patterns of business.
A trade credit insurance therefore can help an export business grow in enormous ways.
9 Ways Trade credit insurance will help grow your export business
1. Expansion into International markets
Your business can expand into international markets by making strategic credit decisions and offering competitive terms, rather than relying on cash or letters of credit.
2. Ability to obtain financing
Insured receivables serve as secured collateral, allowing your business to obtain more working capital at lower rates.
3. Increase market penetration
Your business can increase market penetration by assessing credit risks, pre-qualifying clients, and having additional protection to confidently attract new purchasers.
4. Increase Market Share
Your business can increase sales and improve client relationships, offer better conditions and credit limitations that will result in increased market share.
5. Significantly Increase Sales
Having an accounts receivable insurance will help your business Increase sales with a key customer aggressively without fear of a financial loss.
Having a debt insurance will safeguard your business receivables, and assess the creditworthiness of new customer portfolios.
7. Attract investors and partners
Having credit insurance will make you an attractive business partner for potential investors and partners. You will also be a better prospect to the suppliers you are looking to work with.
8. Improve your business relationships
With trade credit insurance you develop a reputation that would facilitate relationships with your most prestigious customers.
9. Do more with the extra cash flow
Credit insurance allows you to manage your cash flow with the peace of mind that outstanding payments are covered. This gives you the assurance to invest your sales earnings in the expansion of your business. The extra cashflow will help you make better investments into your business.
Credit insurance is a lot more than just debt protection. It is also about business intelligence and maturity.