Assessing the solvency and reliability of export partners takes time and costs for a company, but at the same time it is one of the most necessary activities in business relations. What is credit insurance and how it helps mitigate risks, writes Katrin Savi, member of the board of directors of KredEx Krediidikindlustus.
The demand for credit insurance depends on the economic environment. When existing export markets fail, companies are forced to look for new markets, sales channels and business partners. So that entering a new market does not lead to immediate financial difficulties, it is worth considering credit insurance, among other things, as one of the risk mitigation tools.
At the same time, we have been faced with multiple crises in recent years, which have forced many long-established companies here and there across the border to give up, so perhaps the ability to cope with long-term partners in a more difficult economic climate needs to be evaluated equally critically. According to research, companies’ credit losses do not occur with new customers, but in 80% of cases concern long-term partners. It is therefore worth evaluating long-term partners and thinking about guaranteeing the entire turnover.
What are the advantages of credit insurance?
Credit insurance gives confidence to the seller in a situation where the buyer is given the opportunity to pay invoices on time, i.e. after receiving the goods or services, and there is a risk that the money will not be received by the buyer when the payment deadline arrives. The seller can also increase sales to existing buyers by offering longer payment terms, which can be crucial in making some purchasing decisions.
International studies have shown that companies that use credit insurance increase their competitiveness, sell their products with greater security, offer credit more often and export in larger volumes and to more countries. The use of insurance leads to savings in the company’s operating and financial costs, as it is suitable as an additional guarantee for financial products, improving the quality of working capital.
You need to compare the cost with the potential damage
Understandably, an important question is how expensive credit insurance is, but we often forget about possible losses from not purchasing the service, which, as practice shows, can be quite significant.
The costs associated with credit insurance are the cost related to the buyer’s risk assessment, which depends on the export destination country and starts from a few tens of euros, and the annual insurance premium. The insurance premium is formed following the evaluation of various risks, including the general situation of national economies, the riskiness associated with buyers, payment terms, whether the entire sale or individual transaction of the company is insured under conditions of credit, etc., and is on average between 0.2-1% of the insured turnover.
It is important to consider, from your company’s perspective, what the relationship is between the price of insurance and the potential loss. The smaller the company’s sales margins, the more difficult it is for the company to cover the loss with its own resources, and this can negatively affect the company for a long time. This is especially true in a situation where a single transaction makes up a large portion of the company’s revenue.
KredEx credit insurance services are intended for both small and large Estonian companies and their subsidiaries. It is possible to insure buyers’ risks both in Estonia and worldwide. We offer solutions from individual buyer risk mitigation to total turnover insurance, short-term and long-term credit insurance. The latter is suitable, for example, if you want to sell investment goods abroad with a payment term of more than two years.
In any case, it is worth thinking twice and considering the possible costs and risks.
You can find further information and our contacts at: www.krediidikindlustus.ee
2024-01-18 13:26:28
credit-insurance-helps-mitigate-export-related-risks