Expanding overseas business

with trade credit insurance

Q: Hi Klarins, with Hong Kong slowly emerging out of the Covid restrictions, what trade credit insurance buying trends are you seeing in the market?

A: We have certainly received more enquiries on trade credit insurance and businesses seeking risk migrating advice since Q2 2022. They come from all channels, such as direct, referral and digitally, and in particular, the household equipment and electronics industries. As a trusted and reputable brand, many are being referred by their own buyers in the US and Europe!

As trading companies are experiencing a tremendous bounce-back from the relaxation of Covid measures, exporters are keen in protecting their accounts receivable against bad debts through credit insurance. When negotiating with new customers in new markets, especially exporting to those in the US and Europe where higher sales and longer payment terms are involved, our global company database can offer exporters with credit rating insights to help them with formulating cash flow and internal credit management procedures. 

Q: What are the common credit management tools that traders usually consider?

A: In general, there are several choices such as factoring and letter of credit. For the former, it is selling your accounts receivable to a third party at a reduced cost. The biggest advantage is immediate cash flow of course, compared with having the accounts receivable sitting on your books and prone to non-payment or even insolvency risks. Downside being loss of control of invoicing and customer relationship, and not realizing the full value of sales.

As for the latter, letter of credit is a payment to be received from the buyer guaranteed by a bank. It provides security for the seller with the bank’s involvement as the guarantor. However, paperwork is rather tedious and it is one of the most expensive options among credit management tools. And from the buyer’s point of view, it lacks the flexibility of trading on open terms.

Lastly, there is of course self-insurance, which means no credit management in place and seller would absorb any payment loss. Minimal ‘costs’ involved obviously, but seller may be trading with their hands tied due to the fear of potential loss.

Q: How does trade credit insurance compare with these tools? Are there any added advantages?

A: The biggest advantage of trade credit insurance is that companies are empowered to trade on open terms with guaranteed protection from non-payment or unpaid invoices. Leveraging on our 120+ years and 80+ million companies database, we have a deep understanding of how companies behave in terms of payment behaviour. This is particularly valuable for exporters planning on penetrating new markets and customers.

With our global presence, it means that we have the resources and knowledge to assist our customers in dealing with their overseas buyers, including credit insights and international debt collection. As for the cost of a trade credit insurance policy, it is very affordable as it is usually calculated based on a small fraction of the turnover. There will also be less paperwork involved.

Q: Could you provide a recent example of how trade credit insurance supported our customer in their post-pandemic journey?

A: With the recent reopening of international borders, one of our customers is looking to expand to overseas markets such as the US and European countries. However, in view of inflation and elevating shipping costs due to staggering port congestions worldwide, our customer is very concerned about cash flow, not only of their own but also that of their customers. Therefore, our customer seeks a trade credit policy to protect their account receivables against bad debts.

Our customer is in the kitchen appliances business with insurable turnover up to US$18 million. For buyers requesting longer payment terms, our insured percentage is 90%. Apart from that, our customer is also able to make good use of our global database that offers buyer grading to support their strategic business decisions. Overall, our policy is able to offer a peace of mind and additional comfort as they expand their business to overseas markets.