Why Exporters Need Export Credit
| Date | 01 February 2013 |
| DOI | http://doi.org/10.1111/1758-5899.12024 |
| Published date | 01 February 2013 |
Why Exporters Need Export Credit
Jon Coleman
Chairman, British Exporters Association
Exporting provides a promise of growth but any com-
pany, regardless of its size, needs to assess the additional
risks associated with trading cross-border in comparison
to selling into a domestic market. This applies equally to
the first-time exporter as it does to the experienced
exporter. So what are these risks and to what extent can
the exporter mitigate them?
The most significant issues facing the exporter when
considering an export market include currency, the regu-
latory, tax and legal environment, and the security or
otherwise of receiving payment under the contract,
together with more familiar risks such as the risk of the
buyer becoming insolvent. The exporter’s bank will be
able to assist with currency exchange risks. Legal and tax
advice should be sought on regulatory and legislative
issues. A well-written contract will clarify your obligations
and liabilities. However, significant financial and political
risks will remain that the banking community, lawyers or
tax advisers cannot offset. This is where export credit
insurance comes into play.
Export credit insurance protects receivables and covers
losses incurred as a result of export contract frustration.
It helps to protect the exporter’s contract cash flow and
bottom line. Looked at another way, companies routinely
insure their plant, equipment, buildings and working cap-
ital against risks of loss. The rationale for insuring your
receivables and covering the risks associated with poten-
tial losses under export contracts is a logical extension to
an exporter’s policy on insuring risk.
So what risks are specific to exporting? These can be
categorised as commercial/buyer risk and country/politi-
cal risk. In the commercial risk category the principal risks
are that your buyer will become insolvent (or be deemed
to be insolvent) or be unable or unwilling to make
payments when due (protracted default). There are a
number of perils in the political risk category: contract
frustration (where the buyer’s country repudiates its
foreign obligations or a government buyer cancels the
contract or refuses to sign acceptance certificates),
conversion and transfer risk (where your buyer makes
the payment in local currency but his or her bank or the
central bank does not convert and/or transfer the funds
to the exporter’s account), moratorium (where the
buyer’s country refuses to allow payments to be made),
export licence withdrawal (act of the exporter’s govern-
ment), import licence nonissue or withdrawal (act of your
customer’s government) and war or act of God.
Any of these risks could result in the invoice not being
paid or the export contract being frustrated, resulting in
losses to the exporter. The good news is that export
credit insurance is available to cover these risks. Export
credit insurance coverage is divided into credit risk cover
(the risk of nonpayment) and preshipment cover (cover
against losses resulting from contract frustration occur-
ring during the manufacturing period). The exporter’s
need or otherwise for preshipment cover will be deter-
mined by the nature of the contract. If supplies are
bespoke and have no tangible resale value, then preship-
ment cover should be purchased. Alternatively, if the
goods can be readily resold to another customer then
the exporter has no need for precredit risk on this ele-
ment because he or she can mitigate any potential loss
through the reselling process.
A common, if unwelcome, feature of most export mar-
kets is the requirement to provide on-demand contract
bonds (typically an advance payment guarantee in
exchange for an advance payment received at contract
inception or a performance bond). On-demand bonds
are financial instruments normally issued to the buyer on
your behalf by the exporter’s bank. By their very nature,
on-demand bonds can be cashed by the buyer without
reference or recourse to the exporter. Hence there is a
risk that the bond could be called unfairly. Bond insur-
ance cover is available. It protects against wilful or capri-
cious calls or calls resulting from political events. As a
matter of course the exporter should obtain unfair calling
cover from the same export credit insurer that provides
the export credit insurance cover –this ensures seamless
cover provided by one insurer across all categories of
contract risk.
In addition to mitigating significant export risks, there
are other benefits of export credit insurance. The exis-
tence of the cover may enable the exporter to propose
more favourable terms of payment to the buyer or
indeed facilitate a longer invoice payment period than
the exporter would be willing to extend if uninsured. The
cover can also be used to facilitate invoice purchase
arrangements or indeed be used to underpin a contract
forfaiting arrangement; in either case the exporter’s con-
tract cash receipts can be accelerated, thus minimising
©2013 University of Durham and John Wiley & Sons, Ltd. Global Policy (2013) 4:1 doi: 10.1111/1758-5899.12024
Global Policy Volume 4 . Issue 1 . February 2013
110
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