How to insure against non-payment when exporting

Ensure before you insure

What happens if your buyer can’t or won’t pay? Can you avoid or lessen the risk?

Your first option should always be to use payment methods which will ensure the money gets to you, such as payment upfront, or a letter of credit. If these options aren’t available, you should consider trade credit insurance.

Decide what type of cover you’ll need

Trade credit insurance moves the risk of non-payment from your company to the insurer. It can protect you from the non-payment, insolvency or bankruptcy of your customers. It can be especially beneficial in higher-risk industries such as mining, energy, and automotive and in higher-risk economies.

A policy can also include an element of political risk insurance. This insures against the risk of non-payment by overseas buyers due to government-related activity. This could include political unrest, changes in the law, nationalisation, inflation and currency issues.

You may not need all of these cover elements. Much like other insurance products, policies will vary, with different levels of cover and cost.

Make sure you’re eligible

You may not be able to get insurance for some markets or products, so take to establish your eligibility and arrange cover before you start the export process, especially if your expected cash outlay is large.

Understand what’s involved

The credit insurer will review your existing sales and customer base. Based on their evaluation, they’ll propose credit limits that they can insure up to. These are usually either by client or country, and will cover your business over a given time period.

Trade credit insurance usually covers an exporter’s total order book, rather than individual accounts or transactions. The insurance premium rate reflects the average credit risk of the exporter’s order book of customers. It will usually be a percentage of the credit limits covered, usually 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 is likely to be in the range of 75 - 95%.

Consider using an intermediary

There are a number of providers supplying export insurance options, so research carefully to find an option which works for you.

The UK government organisation, UK Export Finance (UKEF), works with banks and insurers to arrange insurance policies for exporters. Its advisers have a wide knowledge of the insurance options to UK exporters and how they work. UKEF can help you obtain coverage when other financial institutions may be unwilling to help, due to risks involved with your market or product.