Originally published in the CAIDP Quarterly Bulletin November 3, 2018:
Why Would You Not Insure Your Export Receivables?
Phew – who knew “THAT” was coming?
Definition of “THAT”: US trade wars, Brexit, Trans-Pacific Partnership without the US, Venezuela’s Economic collapse, Clients who delay payments unfairly, Sears insolvency, General Motors insolvency … and so on ….
As shown in the graph below, over 30% of Canada’s GDP comes from exports. Many of those exporters are established businesses that have experience and have learnt that it is crazy not to insure export receivables. Some of the reasons cited are as follows:
1. The exporter is unable to have the same control over receivables generated from exports as they do with domestic clients. Whereas companies are usually well tuned in to their domestic markets where they are familiar with their buyers, local language and law, they often do not have the same information pipeline available to them in foreign markets. Credit Insurance (also called Receivables Insurance) is provided by specialized companies or entities whose businesses depend upon their intimate knowledge of foreign markets. The insurance policy allows the exporter to leverage that information.
2. Financing Institutions usually base their working capital loans on collateral that is centred on accounts receivable. As is the case with exporting companies, the financing institutions are pretty comfortable with domestic receivables (more so if they are credit insured) but when it comes to advancing funds against foreign receivables …. not so much. It is not hard to imagine the Institutions’ concerns when they see foreign governments threatening huge tariffs that could threaten the solvency of their customers’ foreign buyers and thereby threaten the very existence of their customers through a fatal cash flow loss.
3. While the exporter might be very confident in the microeconomic financial wherewithal of their foreign customer, they may be less confident in the macroeconomics/political stability of their customer’s country. Credit Insurance can provide coverage against: political/economic events preventing or delaying transfer of payments; government legislation preventing release of funds or absolving a foreign buyer’s payment obligations; government action preventing performance of the contract; and insurrection, war and natural disaster.
4. One of the most understated reasons is the benefits accruing to small businesses. First, there are those small businesses that are not yet exporters. To become exporters, usually, they must first establish themselves in Canada. That process can be secured and accelerated by Credit Insurance (enhanced financing from financial institutions, attractive to investors and no cash flow blips caused by customer non-payment). As they take their first tentative steps to address the needs of foreign buyers, they can rest assured that those buyers will pay (or, if they do not, the Credit Insurance company will). There is a wealth of information provided by Credit Insurers (the perfect complement to the Trade Commissioner Service) that the new-to-export company can leverage. To get a sample of what is available, please visit Tradese-curely.ca.
To protect against the next “THAT”, Canadian businesses should consider adding credit insurance as a financial tool forming a vital part of their risk strategy. In order to appreciate the options available to Canadian exporters, please visit http://receivablesinsurancecanada.com/.
There you will find virtually all Receivables Insurers registered to do business in Canada (including the largest Receivables Insurers in the world), Export Development Canada and several brokers who specialize in providing Receivables Insurance.
by Ian Miller, Past and Founding Chair of the Receivables Insurance Association of Canada (RIAC) and Emeritus RIAC Member.