If you have a business that sells product or service internationally, or if you are considering selling your product or service to foreign buyers, you may want to consider using receivables insurance as a way to grow your business and mitigate risks commonly associated with international sales.

If you are selling internationally, the least risky way to sell is cash in advance of shipment of goods or providing of services. However, this is not always an option if the company wishes to grow and expand. Sometimes the company may have to provide some sort of credit to the foreign buyer. At that point the seller must be prepared to minimize any risk associated with the transaction. One option to look at is receivables insurance.

Receivables insurance actually insures two primary types of risk, commercial risk and political risk. Commercial risk would usually include insolvency, bankruptcy or default on behalf of the foreign buyer. Political risk most typically covers issues such as war, revolution or inability to convert foreign currency. Mitigating these primary risks make sales to buyers in foreign markets less formidable.

In addition to lessening risks, receivables insurance allows a company to more aggressively seek market expansion for their business. Additionally, the company can be more competitive in offering products or services on terms that mimic other businesses selling similar offering. The insurance can also be a tool that can be used to facilitate financing of foreign sales. Banks can take assignments on these insurance policies and their risk is substantially reduced. Even if no external financing is involved, a business using this type insurance will obviously severely reduce the risk involved and protect their capital.

Foreign receivables insurance is available through private insurers and public entities. The most well know public provider of this insurance is the Export-Import Bank of the US. This bank provides coverage for small businesses selling on terms to foreign buyers. The business selling has to meet certain criteria including being small, as defined by the US Small Business Administration, and selling US produced products. Insurance can be applied for on-line or through an insurance broker. Cost for the insurance is very reasonable and is based on the term being insured. Policies can be purchased to cover one foreign buyer or multiple buyers. There are some restriction including selling to customer in countries that the US prohibits sales to or for military sales.

In addition to the Export-Import Bank, many private companies also offer foreign receivables insurance. The cost and type coverage will vary from company to company. These companies provide coverage for both small enterprises to larger companies. An insurance broker may be a great source for information and competitive cost analysis.

Percentage of loss covered will vary from policy to policy. For example, coverage from the Export-Import Bank can go up to 95% for losses. Clearly one can see the benefit of having a sale insured in case the worst happens.

One of the best reasons to use this type insurance in that the insurer will perform the credit analysis for the seller. This part of the credit function can be transferred to another party. Oftentimes, the small business does not have the resources or access to information regarding a foreign buyer.

Foreign receivables insurance can be a great tool for helping a small business grow and expand their markets. The insurance can lessen risk associated with selling into foreign markets. Further exploration of this type insurance is encouraged if one is considering selling into foreign markets.

(Source: Darryl Hulsey, Consultant, UGA SBDC International Trade)