Trade Credit Insurance is often highlighted as a valuable tool for small and medium-sized enterprises (SMEs) seeking to grow their export sales. Of the various credit risk management options available, credit insurance is the most comprehensive, particularly when venturing into unfamiliar foreign markets.
By partnering with a specialized insurance provider, businesses can access a solution that includes initial risk assessment, potential indemnification for insolvent debtors (within policy limits), and debt collection efforts managed within the debtor's country.
In essence, Trade Credit Insurance enables even small companies without extensive knowledge or networks to confidently expand their operations overseas. Let's explore how this works.
The challenges and opportunities of selling abroad for SMEs
For small and medium-sized businesses, exposing turnover to the risk of non-payment or insolvency by customers is a delicate decision. This often results in a cautious approach, focusing on long-standing customers with a reliable payment history and limiting operations to a specific geographic area.
Payment terms requested by prospective clients can also be a critical consideration. Companies often seek extended payment terms of 30, 60, or 90 days. Granting such extensions, especially to unfamiliar partners, can be a risk that SMEs are reluctant to accept, fearing their existing cost structures might not withstand potential losses.
Consequently, many SMEs require advance payment of invoices before providing goods or services. While this approach is less risky, it can also be more restrictive, as offering extended payment terms can be an advantage when establishing or strengthening business relationships.
These concerns are even more relevant when considering international expansion. Strict payment terms, limited market knowledge, and fear of significant losses often lead to a decision not to pursue overseas sales at all.
Exporting with Trade Credit Insurance: A Real-World Example
The company
Consider a small company (with a R2 000 000 annual turnover) operating in the fruit wholesale sector. The domestic market in South Africa is well-established and consists of a range of reputable clients.
The issue
Demand for the product is primarily growing overseas. Specifically, the market in United Arab Emirates appears to present excellent opportunities, with numerous inquiries originating from that region.
However, the company has had a negative experience with a client in that country, leading to a significant loss that was never recovered. This has deterred them from pursuing business in the region.
Collecting trade receivables can be a lengthy, complex process, particularly when dealing with international debts without a local support network. Unsuccessful pre-litigation and legal actions for debt recovery can result in a double financial burden: the lost revenue due to the default and the legal fees incurred during the recovery attempt.
The solution
The company finally decides to contact an expert and insure short-term trade receivables, the part of turnover developed on credit terms, with payment extensions up to 90 days.
The credit insurance policy covers the risk of non-payment and insolvency for debtors both domestically and abroad. Additionally, it begins with a preliminary analysis of current and potential clients, allowing the insurer to guide business decisions with a focus on preventing non-payments.
The company can now securely develop its business and potentially receive indemnification of up to 90% in case of invoice non-payment for clients covered by the policy.
In summary, the company can:
- Select clients confidently in United Arab Emirates by submitting each potential buyer to the credit insurance company for evaluation. The insurer assesses their creditworthiness and grants coverage based on a wealth of data and information at its disposal.
- Successfully expand operations overseas, quickly recouping previous losses due to insolvencies encountered while navigating an unfamiliar market without guidance.
Situations like the one described are quite common within the South African business landscape.
At Allianz Trade, a leader in credit insurance in South Africa and worldwide, our mission is to help companies navigate the complexities of global trade.
If your goal is to steer your SME towards growth and stability, explore our range of solutions.