Magazine article Business Credit

Leveraging Export Credit Insurance to Mitigate Foreign Risk and Expand International Sales

Magazine article Business Credit

Leveraging Export Credit Insurance to Mitigate Foreign Risk and Expand International Sales

Article excerpt

International Affairs Section

Businesses that export goods are subject to a different risk than non-exporters.

Has a lucrative international deal slipped through your fingers because your international trading partner could not arrange local financing? Has an overseas customer given a contract to a European firm instead of your company because of better repayment terms? Have you shied away from emerging markets altogether because you're worried about collecting your money?

International trade is on the rise, representing about 30 percent of the Gross Domestic Product of the United States compared to less than 10 percent thirty years ago. Yet, many companies perceive that offshore financing remains an ocean away.

Many concerns surrounding foreign risk can be dispelled by demonstrating how export credit insurance mitigates risk and helps companies expand their international sales. While the wide variety of export credit insurance programs may appear overwhelming at first glance, a knowledgeable financial institution can help businesses of any size successfully incorporate export trade finance into their international deals.

Why Export Credit Insurance?

Export credit insurance programs help U.S. exporters develop and expand their overseas sales by protecting them against loss should a foreign buyer default for political or commercial reasons. Its primary purpose is to reinforce and enhance the credit manager's approval of a customer and understanding of market risks, while providing a double-check on his/her judgment and protecting the business against any losses which may result from events over which they have no control.

Through export credit insurance, sellers can increase international business with greater confidence, since they can offer more reasonable credit terms to qualified buyers-with assurance that their receivables will be collectable up to a pre-determined percentage of their face value and within predetermined credit limits. In comparison, asking for confirmed Letters of Credit often precludes the U.S. exporter from winning the sale, either because they are so expensive or virtually impossible to obtain.

There are four reasons why exporters use credit insurance:

1) Mitigating foreign risk-this is particularly important for emerging markets.

2) Overcoming competitors' selling terms-many foreign export credit agencies offer aggressive financing to buyers to stimulate their country's export sales.

3) Financing-in many instances, mediumterm financing is not available in local markets. A good trade finance bank will help sellers integrate financing packages with their sales offers.

4) Cash flow-export insurance can help enhance cash flow and the balance sheet.

Mitigating Foreign Risk

Businesses that export goods are subject to a different risk than non-exporters. International trade is affected by the stability of the local currency market and social, political and geographic issues. Foreign risk requires businesses to take additional precautionary measures to protect their interests, as these variables directly impact the customer's ability to repay.

Many capital goods producers and distributors looking to expand their sales abroad uncover market opportunities in emerging markets. For the past 30 years, Hoffman International, with annual sales of $30 million, has found great interest in its large construction and road building equipment in Latin America and Europe. Recently, U.S. government initiatives to increase exports to Africa have taken Hoffman into the emerging markets of Uganda and Cameroon. In addition, Hoffman is exploring new opportunities in Russia. "Unlike more developed international markets, these emerging economies are in great need of capital goods that are not produced domestically," said Joseph Watters, president of Hoffman International.

The catch is that, oftentimes, emerging markets offer little in terms of local financing, and the risks are greater than the risk of doing business with G7 nations (the U. …

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