Before you fulfil an order, think about what happens if a buyer doesn’t pay. You should:
- research the country to see what legal recourse you have
- consider a payment method that offers more security like a letter of credit
- consider getting insurance to cover the risk of non-payment (credit insurance)
Credit insurance explained
What is credit insurance
Trade credit insurance is an insurance policy and a risk management product offered by private insurance companies. Exporters can take advantage of an insurance policy to protect themselves from the non-payment, insolvency or bankruptcy of their customers.
A policy can also include an element of political risk insurance which insures against the risk of non-payment by overseas buyers due to issues brought about by or as a result of foreign governments, such as political unrest, changes in the law, nationalisation, inflation and currency issues.
How credit insurance works
In order to arrive at a proposal for your business, a credit insurer will review your existing sales and customer base. Based on an evaluation of this, they will propose credit limits which they can insure. These are usually either client or country limits, and your business will be covered to the extent of these limits over a given time period.
Trade credit insurance usually covers an exporter’s total order book and not just individual one-off accounts. The insurance premium rate reflects the average credit risk of the exporter’s order book of customers and will usually be a percentage of the credit limits covered, typically around 1 - 2%.
Typically, the policy will pay out a percentage of the value of your outstanding invoices over a given term (e.g. 12 months). If you make a claim, the policy will only pay out a given percentage of the outstanding debt owed. This figure can vary significantly, but will typically be in the range of 75 - 95%.
As a business, you will need to consider the cost of the insurance versus the risk of non-payment by clients.
UK Export Finance
UK Export Finance offer an insurance policy for high risk countries.