New Opportunities

Exporting

The American Middle Market Can Use Insurance to Grow and Mitigate Risk

By Marcos Lopez

In today’s global economy, businesses need to expand beyond their geographical confines in order to organically grow.

Within the United States, approximately 99 percent of businesses are companies that have less than 500 employees, and studies have shown that economic uncertainty is the No. 1 concern for these middle-market businesses. Now more than ever, we face an ever-changing domestic and economic environment, and because of this, managing future risk has become a key initiative for business leaders. While it may seem like 2008 is long behind us – a time when 200,000 businesses closed their doors – we’re still in a very turbulent economy with a lot of unknowns. The only known is that non-payment of trade or bankruptcy can and does routinely occur. In 2016 alone, tens of thousands of businesses failed. Many of your customers, vendors and clients might have been among them. No company, sector or industry is resistant to this. The risk of buyers defaulting on debt will always be present. Take the United Kingdom, for example. Few experts or major financial companies predicted Brexit would occur — and that’s exactly what’s looming. Now one of the world’s leading financial hubs is working to restructure everything, starting with trade agreements, in order to continue to import and export as they were.

How You Can Mitigate This Risk

First and foremost, it’s important to find the right partner to help you understand all the options that are out there for your business. Although trade credit insurance is one of the best options to help companies protect themselves from economic uncertainty, buyers need to remember that there are many options when it comes to credit insurance providers, and picking the right one for your business is one of the most important parts of the process.

For a lot of American businesses to grow, they need to export, and herein lies the problem. Exporters typically wish to be paid upon shipment; however, importers traditionally like to pay upon receipt to verify the product upon arrival. So, how does a business leader combat this issue? The solution is rather simple: to bridge the time when importers are willing to pay with when exporters wish to be paid, a credit or guarantee could be used. Trade credit assists by mitigating the risk of cashless transactions. Typically, trade credit insurance policies are short term and have maturities of less than 90 days. These can be extended depending on longer production and delivery requirements. This allows the business to grow geographically, enabling it to cross borders and establish business relationships internationally with minimum overhead and while mitigating the risk.    

Ongoing Growth

Insurance will always be there to protect clients but, more than just being a safety net, trade credit insurance offers clients the unique ability not just to be protected against a loss but to have the opportunity to expand their business in markets that they traditionally felt were too risky to participate in before. It’s often in these markets that higher margins can be obtained, and with credit protection, companies are safely able to increase sales and margins simultaneously in an area in which they most likely didn’t do business before. 

Trade insurance offers companies numerous benefits, including the ability to expand sales not just domestically and internationally; in many cases, it allows companies the ability to improve financing terms with their lenders. When a company purchases trade credit insurance for its accounts receivables, it allows the company not only to increase sales to its existing customers but also allows them to expand sales in markets and with customers that they perhaps felt were too risky to do business with prior to having trade credit insurance. Once a business has trade credit insurance for their receivables, banks will typically lend more capital against those receivables, as they’re now insured — which typically reduces the costs of the funds for the company.

The Bottom Line 

Trade credit helps companies seek opportunities where it makes the most sense rather than where the opportunities are simply doable. It allows businesses to capture the opportunities with higher margins and growth opportunities. Clients are typically able to achieve higher margins in markets where at first glance it may appear too risky to do business in. The goal should be to find a partner that can help manufacturers capture these opportunities and capitalize on the higher-margin business opportunities while protecting them at the same time. 

Trade credit offers companies protection, and it’s often perceived that this protection is the primary reason to purchase trade credit. However, the most common benefit companies obtain by investing in a policy is that it assists them to increase sales and profits without taking on additional risk. Growth is actually the most common benefit companies get by utilizing a policy. It’s for this reason that even if a policyholder never makes a claim, these policies will typically pay for themselves many times over.

Credit insurance is often used in export markets with countries and customers where a business has had no prior experience or exposure, or a location that has a political environment that makes it more challenging to do business in. Trade credit insurance provides protection to companies in international markets where they’ll traditionally face unique export risks, while allowing those companies to expand their opportunity for growth abroad. In many ways, companies that conduct business-to-business trade are already investing in a trade credit program. Trade credit insurance simply allows businesses the ability to gain exposure safely to both importers and exporters around the world, allowing them to expand their individual businesses and increase the number of opportunities they have.

Marcos Lopez is Vice President and Sales Producer, Property & Casualty at NFP’s Chicago office. Visit nfp.com for more information. 

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