The protectionist policies of the Trump administration and other populist governments around the world have spawned a round of trade wars that pose a real threat to companies doing business internationally. These trade wars have the potential to cause widespread bankruptcies, defaults and cause other disruptions to those involved in international trade.
For small and mid-size U.S. businesses, these political risks and disruptions can take many forms. Trade partners may suddenly have their trade licenses cancelled, be unable to convert payments to dollars or transfer goods out of the country. Of course, a government may issue an embargo on goods from specific countries.
Any of these actions can lead to nonpayment of invoices, putting at risk a good deal of an exporter’s accounts receivable assets and threatening continued operations. Companies can protect themselves by requiring letters of credit or collateral, but these requirements can lead to higher prices, anywhere from 5 to 9 percent higher, and put companies at a disadvantage against competitors that can do business on open account terms.
Trade Credit insurance (TCI), or accounts receivable insurance, is designed to protect these assets without putting companies at a competitive disadvantage. While also valuable to companies only doing business domestically, it is especially valuable for those operating internationally and facing political risks. In fact, this type of insurance was introduced in the nineteenth century by Lloyd’s underwriters to encourage growth in trade.
TCI protects a company from default or nonpayment by the buyer once receivables are 90 – 180 days past due, depending on the cause and circumstances of default. While tariffs are not covered by this insurance, most significant triggers are events like embargoes, license cancellation, block of a currency and other disruptions.
This protection can make it possible for many small and mid-size companies to grow into both established and emerging markets that would otherwise be too risky. In addition, their insurance partner can provide them with insight into new markets. For example, if a small U.S. manufacturer is expanding in China and is unsure of what terms to offer, they can consult with their TCI provider to determine the best terms to offer. This is valuable intelligence.
Small and mid-size business often look at insurance as a line item expense they would rather avoid, but in the case of international trade, the protection TCI offers can give them market insights, a competitive advantage and the ability to grow in an era of trade wars and political uncertainty.