Export Credit Insurance
Export credit insurance (ECI) is a type of insurance coverage that helps businesses involved in international trade to reduce their financial risks. It is designed to protect exporters against nonpayment of invoices due to any of several potential risks, such as insolvency, political events, commercial disputes, or changes in foreign exchange rates. Exporters can use ECI to limit the risks of being exposed to nonpayment of invoiced exports on credit terms.
ECI helps to make international trading more secure by offering certain protections to exporters. It provides protection against default on payment due to a buyer’s insolvency, which results in the exporter having to bear the full cost of an unrecovered debt. ECI also helps to protect the exporter from political risks, such as the buyer’s government changing laws that stop payments from being made. It also provides coverage against commercial risks, such as buyers refusing to pay, or buyers becoming insolvent. An ECI policy can also help to protect exporters against changes in foreign exchange rates, so that they know that any payments made in foreign currencies will be converted to the same amount they were originally expected in the exporter’s own currency.
Given the range of coverage that ECI offers, it can be a very valuable tool for exporters selling on credit terms. With ECI, exporters can sell on credit terms without taking on all the financial risks associated with doing so. This can help to increase their sales, as buyers are more likely to purchase when they know that their payments are insured against default. ECI also helps to protect exporters from unexpected losses due to currency fluctuations, so that their profits will not be wiped out.
ECI can also help exporters to secure competitive financing, as financiers are more willing to provide funds when risks are insured. This is especially important for businesses that involve international trade, as the risks associated with trading internationally are often higher and more complex than domestic trading. As such, having an ECI policy in place can increase the chances of obtaining competitive financing.
In addition to offering protection against financial losses, ECI can help to improve cash flow by enabling exporters to receive money earlier. This is because the insurer pays out claim payments within a short time period and does not have to wait for the buyer to pay. This means that the exporter can receive payment faster, allowing them to reinvest their money more quickly and take advantage of opportunities sooner.
Overall, exporting on credit terms can be extremely risky, and a good ECI policy can help to reduce the risks. It offers a range of benefits to exporters, from reducing the risks associated with a buyer’s insolvency to improving cash flow. Furthermore, secure financing can be obtained with ECI, which can be an essential factor for successful trading. With all these benefits, it is no wonder that many exporters choose to secure ECI coverage before entering into international transactions.
