A Complete Guide To Export Credit Insurance
If you run a business of any size, the chances are that there will come a time when you need to do some exporting.
You might be a regular export, or you may only need to ship goods overseas every now and then. Either way, it’s important to ensure that your products or services have the proper insurance before exporting to a foreign buyer.
Doing business internationally can be extremely beneficial to the overall growth of your business, but not all buyers are the same. While you may have one client that is consistently reliable with making their payments in a very timely manner, you may very well run into another client that will get your shipment and not send any payment your way whatsoever.
In situations like this, you need to make sure you have a safety net in place that will cover you and your company from a big financial loss. To go about doing this, we need to take a look at something called Export Credit Insurance (often referred to as ECI).
What Is Export Credit Insurance?
In its simplest form, ECI gives exporters added protection on their foreign receivables against a plethora of risks that might result in an absence of payment from their foreign buyers.
These absences of payment can arise in any number of ways. Between commercial-related risks (bankruptcy, slow payments, insolvency of the buyer, etc.) and political risks (revolution, terrorism, war, etc.), there are a great number of reasons as to why you may not receive the proper payment when doing business internationally.
So, we now have a basic idea of what ECI is and what it protects you against, but we’ve only just begun to scratch the surface of this topic.
- What are some additional pros ECI provides?
- What are the inevitable cons?
- What’s the coverage situation like?
- Where can you get Export Credit Insurance?
In this Ultimate Guide to Export Credit Insurance, we’re going to answer all of those questions and more so you can become an absolute pro when it comes to ECI. Let’s get started.
Disadvantages of Export Credit Insurance
We’ve already taken a look at some of the major advantages of ECI, so now let’s dive into some of the not-so-great aspects of this type of insurance.
For starters, there are quite a few exclusions and limitations that are involved with ECI. Since there is a virtually endless list of products you are able to export, you may find that insurers might not have any policies for the exact types of services or goods you want to ship (as well as limitations to which countries you can ship specific products to). When you do find a policy that will cover the goods you want to export and the countries you want to export to, you very well may discover that your insurer will not cover the full cost of your shipment (e.g. If your company needs an ECI policy of $500,000, you might only be eligible for a policy of $250,000).
Additionally, you need to be careful with getting involved with export contracts which carry high rewards and great risks. As with any insurance policy, people often times try to take advantage of them to personally benefit themselves. Polices with these great risks and great rewards generally leave the exporter open to default from the importer.
This is really only a disadvantage if you try to be sneaky with your policy, but it’s still something to be aware of.
Your ECI is there to protect you from legitimate shipping issues, not to be used just for your own personal gain. As long as you use your ECI the way it was meant to be used, you won’t have any problems in this department.
Advantages of Export Credit Insurance
Since we’ve already discussed the main advantage to Export Credit Insurance, this section won’t be too lengthy. However, one big advantage that we haven’t mentioned yet is access to working capital.
As an exporter who owns an ECI policy, you have the potential to acquire access to overseas working capital. By owning an ECI policy, you make it visible to lenders that your business has a safety net against non-paying customers and is a much better credit risk when dealing with a credit loan.
And as if that wasn’t enough good news already, having an ECI policy will also give you the chance to snatch up standby letters of credit. Standby letters of credit are when a bank can guarantee a payment on an exporter’s loans if your buyer is unable to come through with their end of the contract. It may not be the flashiest thing you’ve ever talked about in your business, but its importance is tremendous when doing business around the globe.
Now that we have a solid idea of what Export Credit Insurance is and understand the pros and cons that are associated with it, it’s time to take a look at the different types of coverage you can get with your ECI policy. When dealing with ECI, there are two major types of coverage – short-term and medium-term:
- Offers 90 to 95% coverage against both political and commercial risks – both of which will result in buyer payment defaults.
- Provides coverage for the following products up to 180 days: services, consumer goods, and materials.
- Provides coverage for the following products up to 360 days: consumer durables, bulk commodities, and small capital goods.
- Offers 85% coverage of the total net value of the shipment.
- Provides coverage for large capital equipment for up to five years.
Both short-term and medium-term ECI coverage types offer their own set of pros and cons as well, but deciding which coverage type to go for will ultimately depend on the type and size of your company.
If you’re having trouble making this decision, ask yourself a few questions:
- What type of goods will we be shipping out?
- What are is the size of the goods that are being shipped?
- How long do we need coverage on our shipments?
Questions like these should help you come to a conclusion with your coverage type relatively fast. And once you have that decision made, it’s time to move onto the next step.
Where to Get Export Credit Insurance
Similar to any insurance company, there are numerous Export Credit Insurance policies offered by a great number of private commercial risk insurance agencies.
If you don’t want to deal with any of them, ECI can also be purchased directly through the Export-Import Bank of the United States (more easily referred to as Ex-Im Bank) if you live in the States.
While the Ex-Im Bank is a definite option, exporters based in the United States are highly encouraged to get their policy from an insurance broker that can provide helpful assistance when it comes to find a policy to fit their exact needs and budget.
Some of the biggest brokers out there for ECI policies include Yegg Insurance Services, ARIGlobal, CreditEureka, and Meridian Finance Group.
While there are a vast number of brokers to choose from, one isn’t necessarily better than the rest. Each firm offers their line of policies with certain limitations, coverage types, and more.
Before coming to a final decision, don’t be afraid to take some time to shop around a bit to get a feel for who offers what. Check in with as many agencies as you can to see who has the best policy for your business.
Taking some extra time with this step can save you from mistakenly picking an ineffective policy that will cause you nothing but headaches and stress later on down the road.
Main Differences Between Private-Sector and Ex-Im Bank’s ECI
We’ve mentioned that US-based exporters are encouraged to seek out an Export Credit Insurance policy from a private-sector agency, but there’s a bit more to it than that. It’s important to know the key characteristics of both private sectors and the Ex-Im Bank, so let’s dive in and see what each has to offer:
- There are zero restrictions when it comes to foreign content and/or military sales.
- As a general rule of thumb, the cost is substantially lower than the fees that are charged for letters of credit.
- In regards to premiums, they are determined on an individual basis of risk factors. These have the chance to be reduced for experienced and established exporters.
- The majority of multi-buyer policies cost less than 1% of sales that are insured.
Ex-Im Bank’s Insurance
- Products have to be shipped from the United States of America and have to contain at least 50% of US-based goods/services.
- Covers a wider range of emerging foreign markets that many private sector agencies don’t do business in.
- Unlike private-sector insurance policies, Ex-Im Bank ECI policies do not support military products and/or purchases that have been made by foreign militaries.
- With environmentally beneficial exports, enhanced support is made available.
- Because of United States government policies, support for certain exports might be restricted or omitted from specific countries.
Just like with everything else we have discussed so far, the choice between a private-sector agency or the Ex-Im Bank will come down to the type of business you run, where you’re exporting to, and the contents of your shipments.
If Export Credit Insurance was just a distant thought in the very back of your mind prior to reading this guide, we hope that it is now in the forefront of your mind.
While it isn’t the sexiest business matter to talk about, we’ve established that it is an absolutely crucial tool when it comes to exporting.
Doing business internationally is a huge business decision and is a move that doesn’t come cheap at all. It’s a big step forward in your company’s progress, and with such a big step forward you need to ensure that you’re taking all of the necessary precautionary measures.
While Export Credit Insurance isn’t necessarily the only safety measure you need to take into account, it’s definitely one of the most important ones. Protecting your goods and services and financial health when shipping goods around the globe can be instrumental to the well-being of your business.
Making a large export sales deal that you ultimately don’t receive any payment for can cause havoc if you don’t have an active ECI policy, but after reading through this guide, we’re more than certain you won’t let that happen. To recap, let’s take a look through some of the main points we talked about today:
- Commercial and political issues can prove to be risk factors that have the potential to result in your company not receiving the proper payment for your exports.
- Having an Export Credit Insurance policy for your business ensures that you’ll still receive payment for your shipments even if your buyer is unable to fulfill their end of your contract.
- Just because you have an ECI policy doesn’t mean the full payment amount will be completely covered.
- ECI policies can be purchased through private-sector agencies and the Export-Import Bank of the United States of America.
- One ECI broker isn’t necessary better than all of the other ones. The broker and policy that’s the best fit for you will all be dependent on the type of your company and what sort of goods/services you are importing.
- Export Credit Insurance policies do come with some limitations. Certain products being exported to certain countries won’t be covered on every single policy. Make sure to review the exact guidelines of each policy before coming to a final decision.
- There are two main coverage types for ECI: Short-term and medium-term plans.
Yegg Inc. offer a full range of export credit insurance services. See our export credit insurance service page for more details or contact us to discuss a solution tailored to your individual business requirements.