What’s behind the risky reputation
of lending internationally? The list is
formidable. For starters, financing internationally can entangle a lender in
a complex web of laws and regulations
that vary from country to country,
costing the lender considerable time
and money to document properly.
Some regions come pre-loaded with
political problems. There is also the
exposure to foreign currencies and
their inevitable fluctuations.
Perhaps even riskier is the reputation of extending credit, exacerbated
by the belief that the risk of non-payment increases along with the
distance between buyer and seller.
In the U.S. there are a host of agencies and organizations designed to
facilitate due diligence and provide
lenders with a level of comfort. However, these agencies are not as readily
available outside the U.S., making the
due-diligence process more complex
and potentially more expensive.
Over the years, companies offering
extended credit to their customers
have employed a variety of tools to
mitigate their risk. These include:
Deferred Letters of Credit: Letter of
Credit is one of the most established
and popular forms of payment, due to
the fact that payments are guaranteed
by a bank. However, some companies
shy away from this method due to the
costs associated with issuing the letters and the substantial discount the
company is required to offer in order
to get immediate funding.
Collection Factoring: A favorite
method of risk-mitigation for small
and mid-sized companies looking to
expand, factoring protects companies
against non-payment and risks associated with accounts receivable. Companies with creditworthy clients are in
an excellent position to leverage this
type of financing.
Working capital guarantees: This
solution employs the assistance of
the EXIM Bank and other government
agencies to fill in gaps in the trade
finance markets and act as an interme-
diary for brokers, lenders and export-
ers. It succeeds by offering working-
capital guarantees to reduce the risk
for banks making loans to exporters.
However, the uncertainty surrounding the EXIM Bank’s charter renewal is
causing companies and lenders to look
for other alternatives.
Credit default swaps: Designed
to transfer risk from one party to
another, credit swaps are considered
“insurance” against nonpayments, but
are generally only available to publicly
While these traditional risk-mitigation
tools have generally worked well for
larger businesses, they often are not
practical for SMEs. For example, letters of credit have customarily been issued to large companies, while default
swaps are costly. This has created
a need for a new method of protection for companies, especially in the
SME space, along with a new way to
obtain liquidity against international
The Rise of Credit Insurance
Credit insurance is a fairly new risk
mitigation tool in the U.S. compared
to Europe, where it is widely used.
However, with the continuing globalization of our economy, especially in
the middle market, credit insurance
has become increasingly popular with
early adopters in the finance world.
This is for a number of reasons. Credit
◗ is cost-effective;
◗ provides global coverage due to the
way it is structured;
◗ enables coverage even against
political and commercial risks.
◗ is readily available to businesses
of all sizes, effectively guarding
against customer default, insolvency and bankruptcy; and
◗ protects against practically all
forms of losses stemming from bad
debt, providing the kind of critical
safety net needed to do business in
the modern global marketplace.
Credit insurance allows for the safe
issuance of open terms and increased
credit limits to international custom-
ers or companies expanding abroad.
In many cases it allows companies
to extend length of credit, offering
customers the option not to pay in ad-
vance and thus boost their cash flow
– increasing customer satisfaction
and ultimately sales. What’s more,
unlike letters of credit, credit insur-
ance doesn’t impose premium costs on
customers, which can do wonders for
So why are lenders wary of credit
insurance and its benefits?
In the past, lenders shied away
from using credit insurance because
of a number of challenges associated
with it, such as:
◗ manually tracking different policies
from different carriers;
◗ dealing with the lack of standardization from carrier to carrier;
◗ consequences resulting from credit
insurance policies being monitored
improperly, such as coverage being
dropped or decreased; and;
◗ concerns that compliance requirements are not been met, resulting
in a failed claim and bad debt.
Today, however, technology is making
such complications a thing of the past.
Risk Protection for the Digital Era
While credit insurance may be new
compared to other risk-mitigation
methods, it’s already benefitting both
companies offering extended terms as
well as lenders worldwide. One of the
key reasons for the adoption of credit
insurance is the advances in technology which have greatly reduced the
challenges that historically contributed to the unpredictability of credit insurance. These advances have allowed
for computerized -- and centralized
– management of the credit insurance
policy or policies.
In the digital age, credit insurance
can operate with the same degree of
standardization – if not more – than
its more mature risk-reduction-meth-