Forms of Short-term Financing/Export Credit Insurance
Export Credit Insurance
[edit | edit source]United States banks do not consider foreign accounts receivable to be eligible for financing, the reason being that the recourse to collect against them is limited and expensive. The United States government as well as other governments throughout the world have realized such and established guarantees to banks in the form of payment insurance to stimulate exports. Ex-Im Bank provides United States banks with a guarantee of payment for specific transactions. Some states have created similar local programs. They often work in conjunction with Ex-Im Bank to provide guarantees to lenders to stimulate their local economies. These programs allow banks to lend against a borrower’s inventory and accounts receivable, relying on the Ex-Im Bank or the state program (a domestic source to the bank) to pay in the case of default. This type of guarantee provides insurance of payment.
These programs have been recognized by independent insurance carriers as a potential revenue- generating source, enticing them to enter this market and providing competition for Ex-Im Bank. This free market competition keeps rates low for this type of credit facility and provides alternative sources for a borrower. The guarantee allows the banks to fund inventory; it is limited to Ex-Im Bank and is considered pre-shipment financing. The funding of post- shipment financing is provided by both Ex-Im Bank and private insurance carriers in the form of guarantees to a seller’s bank against accounts receivables.
The range of risk varies from one credit insurance agency to another, but here are examples of some risks covered on a standard basis:
1. Commercial risks only
- a. company insolvency, including both compulsory and voluntary liquidations
- b. individual insolvency (bankruptcy)
- c. protracted default (slow pay)
- d. receivership
- e. the appointment of an administrator.
2. Commercial Risks and Political Risks
- a. commercial risks including the insolvency of a customer and any default on payment (See above)
- b. financial losses resulting directly from political events, economic difficulties, legislative or administrative measures occurring in a country covered for these risks which prevent or delay the transfer of the sums paid by a buyer or its guarantor (transfer risk)
- c. risks of a military or a civil war, a revolution, riot or insurrection
- d. general moratorium decreed by the government of a buyer’s country or by any third country covered for these risks through which payment must be made
3. Political Risks Only
- a. when the client is worried only about non-commercial issues