Insure against pitfalls of export sales

Bryson Patterson
Bryson Patterson

The U.S. dollar has strengthened significantly over the last year against most major and minor currencies. This can be good for U.S. consumers, but constitutes a headache for U.S. exporters trying to make sales in overseas markets.

The dollar has climbed 10 percent against the Euro, 21 percent against the Mexican Peso and 18 percent against our largest trading partner’s Canadian Loonie. Dollar appreciation adds costs to American-made goods sold abroad and costs U.S. production jobs at home. How can you increase sales of U.S. products and services in the global marketplace when costs are on the rise?

One often overlooked option to make U.S. products more competitive is to offer more lenient payment terms to foreign customers. Open account terms can be offered with any additional exposure mitigated through credit risk insurance.

Traditionally, there are four main ways to get paid for export sales. From the most conservative to the most risky, exporters can use cash in advance, a letter of credit, documentary collections and open account terms.

Open account terms generally are viewed as the most risky method of payment for international sales. How can you determine the credit worthiness of your buyer in Brazil or China? You should conduct due diligence by ordering credit reports on your overseas buyers, just as you do for domestic customers. Several companies sell these reports — including Euler-Hermes and Dun & Bradstreet International. Even when you qualify your buyer for open account terms, commercial and political risks remain. These risks vary by company and country, but still exist, even when selling to Canada.

Fortunately, there’s a well-established way to mitigate commercial and political risks by using credit insurance.  Credit insurance is specialized insurance coverage with all the standard insurance features: a policy, premium, deductible and claims process in case of loss. You can get a free quote from specialized insurance brokers and will not incur any costs until you commit to a policy.

Insuring overseas accounts receivable offers exporters several advantages:

You can sleep at night knowing if there’s a default on your foreign accounts receivable, the insurer typically will pay up to 95 percent of the invoiced amount.

You’ll be able to secure additional and larger orders than you could by only offering cash-in-advance or letter- of-credit payment options. This is because your buyers won’t have to provide money up front or prior to receiving goods.

You’ll be able to borrow against insured foreign accounts receivables — unlike uninsured foreign accounts receivables, which lenders typically discount in any loan approval review.

Moreover, the U.S. Small Business Administration export working capital guaranty loan program can be used, along with credit insurance, to establish a revolving line of credit of up to $5 million to fund export transactions from preshipment working capital needs through final payment. The Export-Import Bank guarantees loans above $5 million.

How much does it cost? For a small business, the cost is only 65 cents per $100 or .65 percent of the invoiced amount under the Export-Import Bank’s small business policy — a pretty small markup to secure the three benefits listed above. Typically, this cost can be passed through to the buyer, who would much prefer having open account terms.

If you’re thinking about expanding your export sales in the face of a rising dollar, consider offering open account terms to your buyers by securing credit insurance on those sales. In a world that’s becoming more competitive every day, offering open account terms on an insured basis could make your entry into the international marketplace a huge sales success.