Export Credit Insurance: A Safety Net for Exporters

Export credit insurance (ECI) plays a vital role in the exporting industry. When engaging in international trade, exporters run the risk of non-payment for goods that have been shipped. This can result in a predictably negative impact on profit and operations. 

As per the Export-Import Bank of the United States (EXIM), export credit insurance is a key tool in international commerce. It offers protection against the risk of non-payment by overseas buyers. This insurance empowers businesses to safely expand into new markets, driving global trade, while safeguarding their finances.

Join us as we break down the details of export credit insurance, including the different types available and the advantages of being insured against non-payment.

What is the Meaning of Export Credit Insurance?

ECI is a type of export risk insurance designed to protect exporters when foreign buyers fail to pay for goods received. Sometimes referred to as trade credit insurance, it ensures that you get paid for the goods or services you export, even if your foreign buyer defaults or is unable to pay.

This insurance plays an important role in international trade. It provides exporters with the confidence to extend credit to buyers overseas, safe in the knowledge that their finances are protected. It’s a tool that encourages and enables businesses to tap into foreign markets, fostering international trade and economic growth.

Difference Between ECI and Other Types of Export Insurance

Although often grouped with other forms of export insurance, ECI is unique. 

Here are some of the other types of export insurance and how they differ from ECI.

• Marine Cargo Insurance: This policy protects physical goods during transit, covering losses due to damage, theft, or loss of cargo.
• Freight Insurance: This type of insurance covers the liability of the freight company in the case of lost or damaged cargo.
• Product Liability Insurance: This coverage is for damages or injuries caused by a product sold by the exporter.

ECI stands apart from these, focusing specifically on the financial risk of non-payment by the foreign buyer. In other words, if you want to protect yourself from the financial impact of physical damage, you’re going to need to invest in further insurance. 

How Does Export Credit Insurance Work?

While there are a few options available, export credit risk insurance is straightforward. The following hypothetical scenario illustrates how the process works.

1. An exporter applies for a policy, detailing the terms of their transactions, the buyer’s details, and the potential risks. 
2. Once the policy is issued, the exporter extends credit terms to their foreign buyer.
3. The parties agree on a price and the exporter ships their goods to the buyer. 
4. Regrettably, the buyer defaults or is unable to pay.  
5. The exporter files a claim to recoup a significant portion of the purchase price, often up to 95% of the transaction’s value.

This relatively simple process prevents significant losses for the exporter. They’ll be able to continue participating in international commerce with minimal interruption to cash flow.

What is the Advantage of Export Credit Insurance?

Just how many major advantages are in export credit insurance? While insuring against non-payment is the primary function of ECI, the advantages of being insured extend much further. 

Having an ECI policy in place safeguards the export company’s bottom line. In turn, this enables strategic business decisions that drive growth and profitability.

What are the Major Benefits of Export Credit Insurance?

The benefits of export credit insurance include:

• Risk Mitigation: This is the most obvious benefit. Being insured against non-payment gives exporters peace of mind while conducting business. 
• Better Loan Options: Exporters backed by ECI usually have greater borrowing power and higher credit limits with lenders. More working capital means you can use an aggressive growth strategy.
• Selling to High-Risk Areas: Uninsured exporters can be hesitant to do business with developing markets or volatile regions. Being insured against non-payment allows exporters to confidently export to these markets and establish a foothold.

Now that we’ve defined what ECI is and its benefits for exporters, let’s take a look at the three main types of export credit insurance.

What are the Types of Export Credit Insurance?

Export credit insurance companies offer three main types of ECI: single-buyer, multi-buyer, and express. They differ based on the length of time they’re effective and the circumstances under which they’re purchased.

Differences Between Types of Export Credit Insurance

Understanding the different types of export credit insurance policies available is crucial for exporters. Each type of policy caters to different business needs and operating environments. 

Let’s delve into the specifics.

1. Single-Buyer Policy: This policy covers credit risk associated with a single transaction. For instance, consider an exporter who receives a large order from a customer located overseas in an unfamiliar market. Due to the size of the order, the exporter is worried about the risk of non-payment. This policy can offer coverage for this specific transaction.

2. Multi-Buyer Policy: This policy covers multiple foreign buyers. It’s ideal for companies who serve multiple customers across several markets. Imagine a company with a large export operation spanning several countries and customers. Managing individual policies for each buyer would be inefficient. In this case, a multi-buyer policy offers a consolidated solution, providing the exporter with coverage across multiple markets and buyers.

3. Express Policy: Express policies are designed for small businesses with limited experience extending credit overseas. They offer a simplified application process and a comprehensive coverage package. An express policy is ideal for small exporters who lack the resources needed to assess and manage credit risks. It provides a cost-effective insurance solution that protects the business against non-payment.

Policies are further separated into short term and medium term contract lengths.

• Short Term: This policy insures the value of consumer goods and materials for up to 180 days, or bulk commodities for a period of up to 360 days. The goods are insured for 90 to 95 percent of their value.
• Medium Term: For large capital investments involving expensive equipment, medium term is the way to go. Goods are insured for 85 percent of the net contract value over a period of up to five years.

In the following table, you can see some examples of how much an exporter stands to recuperate on an export transaction under a few different circumstances.

USD Recovered With Export Credit Insurance

Percentages sourced from exim.gov

While the reasons for non-payment have no bearing on the claim itself, they do serve to illustrate the unique challenges that make export credit insurance so vital to export businesses.

Each type of export credit insurance policy has its own benefits and is suited to different trading situations. It’s important for an exporter to assess their unique requirements. The right insurance policy can be a significant asset, helping businesses to grow and thrive in international trade.

When Should an Exporter Get Export Credit Insurance?

Always purchase export credit insurance coverage prior to finalizing a price with your buyer. The cost of insurance can and should be factored into your operating costs. In turn, it should be a determining factor in your overall selling price.

If you’re trying to decide whether you should insure your sale in the first place, take the following factors into account.

• The Markets You’re Entering: Are you planning to do business in a volatile region? Political risks and upheaval, riots, and even outright war can break out in these areas. Even the most well-intentioned buyers might find themselves unable to pay due to factors beyond their control. It’s wise to purchase ECI before shipping to these parts of the world.

• What You Sell, and to Where: Do some research about the commodities you’re selling. Are they routinely targeted by scam buyers who don’t pay? Keep in mind, this can vary from market to market. Get insured if you find frequent cases of non-payment for the commodities you offer.

• Your Relationship With Your Foreign Buyers: If this is your first time selling to a particular buyer, insuring against non-payment is a prudent measure. Even if you’ve done business with a buyer several times without issue, it never hurts to be insured.

• Letter of Credit Availability: If your customer is unwilling or unable to secure your transaction with a letter of credit, you should almost certainly purchase ECI to minimize your potential losses.

Like any form of risk insurance, the greater the uncertainty surrounding a transaction, the greater your need for ECI becomes.

Keep in mind that ECI only covers non-payment from your potential buyers. If you’re looking for advice about what kind of cargo insurance you need to protect against other risks, or any other aspect of the export business, we’re here to help.

Export with Confidence with Cargo Export USA

Non-payment is just one of the potential perils faced by exporters. At Cargo Export USA, we have the experience and know-how to assist you with your export transactions, preventing many problems before they come up. 

Our certified consultants can help you decide which export credit insurance policies are best. 

Our extensive list of services includes:

• Compliance manuals
• Export licenses 
• 1-on-1 Consulting
• And more

Don’t take chances with your exported cargo. Call our team of experts at (866) 301-0635 or connect with us online today and get started on the path to export excellence.