Insurance Offers Global Traders Internal, External Benefits

July 2, 2007
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GRAND RAPIDS — Exporters can lower their risk of selling overseas with export credit insurance offered by the federal government through the Export-Import Bank and some private lenders.

A policy covers commercial risks such as buyer bankruptcy and slow payments, along with some political risks such as wars and terrorism. Currency conversion problems and changes in export and import regulations, which could affect product delivery and payment, are also covered.

The insurance is offered on a single-buyer or multi-buyer basis for a short term of no more than a year, and for a medium term of up to five years. But a policy doesn't completely cover the value of a transaction, as an exporter has to assume a deductible that could run as high as 15 percent depending on the policy purchased and type of good or service insured.

"It's assumed that the seller is going to own a little piece of the risk, if you will. People quite often receive a down payment. There are ways sellers can mitigate that deductible, and it varies from policy to policy," said Martha Gabrielse, vice president of global trade finance and logistics sales for JP Morgan Chase Bank, which was named Export-Import Bank's Small Business Lender of the Year last spring.

A short-term policy provides 90 to 95 percent coverage against buyer defaults on consumer goods, materials and services for six months, and on small capital goods, bulk commodities and durable consumer goods for one year. A medium-term policy provides 85 percent coverage on the net contract value of capital equipment for up to five years.

Tom McGuire, director of commercial services for the U.S. Department of Commerce, said export credit insurance smoothes out the payment portion of a transaction in a foreign market. The normal method has a buyer issuing a letter-of-credit to a seller through a bank near the seller. If everything is in order, an exporter can get paid in a day or two.

"The drawback to this is the overseas buyer says, 'This is going to cost me a lot of fees; every time the bank touches the paper, it's going to charge me something.'

"Basically, the bank is loaning the buyer the money to buy the order, and his interest rates may be very high. And the seller is also going to say, 'This is going to cost me some fees,'" said McGuire.

To avoid high-interest payments and fees that come with a letter-of-credit, McGuire said buyers often ask exporters for an open account, meaning payment would be made when the goods arrive. Agreeing to that could work fine for an exporter who has a good track record with a trusted overseas customer in a stable country, but it's not a good thing to blindly enter into with a new client. And if an exporter asks a buyer for cash in advance, chances are a buyer would probably look for another seller.

So McGuire said a way out of this dilemma is for an exporter to agree to an open account with a buyer, then back that account with export credit insurance.

"The exporter then factors the insurance cost in future pricing. Then he can ship very quickly without a lot of extra documentation, his buyer in a foreign market is deliriously happy, and they can go on and have a great relationship.

"That's why you buy export credit insurance: It lets you offer an open account and it enhances your position with your buyer," he said.

To get coverage, exporters first should contact a global trade banker at their bank to learn of the options available, because private lenders also offer policies in addition to the ones from the Export-Import Bank.

"Their global trade banker would refer them to a broker that represents a number of insurers, including the Ex-Im Bank. The Ex-Im Bank has a number of brokers across the country, and we have several available to Michigan exporters that represent the Ex-Im Bank along with private insurers. They help the exporter find the best fit. It's not a one-size-fits-all," said Gabrielse, whom McGuire called an "expert" in export financing.

"And by using a broker, it does not add another layer of cost," she added.

The Ex-Im Bank partners with brokers, who serve as de facto representatives of the bank. That's why there isn't an additional cost for using a broker.

Premiums for export credit insurance are based on the risks a transaction carries, such as the buyer's credit rating and country, sales volume, and the seller's export experience. Most multi-buyer policies cost less than 1 percent of the amount insured, while those for a single buyer vary. In many cases, though, the premiums are less than the costs to create a letter of credit.

Over the last five years, more than 50 Michigan firms have purchased coverage, and roughly half of those companies are located in West Michigan.

In addition to creating an open account with a customer, Gabrielse said an exporter may also want coverage to manage a balance sheet. Accounts receivable is a key line item on the asset side, and insurance helps protect that asset. Coverage also lets an exporter offer better terms to a buyer, which makes the seller more competitive. And when foreign receivables are insured, Gabrielse said an exporter can use those assets as working capital.

"We call that monetizing their receivables, when they want to borrow against them," she said. "So if they want to use those receivables as a source of working capital, or if they want to monetize them, the best tool is to put some insurance behind them."

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