Beyond cash, there are 3 main ways a company can protect their Accounts Receivable in this environment: Trade Credit Insurance, Letter of Credit, or Non-Recourse Factoring.   

Trade Credit Insurance is intended to ensure that any invoice you send out to a customer will be paid, even if the customer defaults on the payment, or enters bankruptcy. Depending on your policy, you may be able to insure a single large customer, segment of export only buyers, or your entire accounts receivable portfolio (domestic customers can also be included).  The way that export insurance works is simple. If you deliver a shipment, goods, or services to a customer, and they do not pay due to bankruptcy or simply do not have the ability to pay, your insurance company will compensate you, up to the limits set by your policy.  Transactions over a certain value must be approved by your insurer, via credit checks to verify the legitimacy of a buyer.  In today's environment this 3rd party extension of your credit department can be a valuable tool.

An export Letter of Credit (LOC) is another very popular way to safeguard your cash flow and ensure that you are paid by a buyer when your goods or services are delivered. Unlike Trade Credit Insurance, export letters of credit are issued by banks.  A letter of credit is, essentially, a commitment by a bank to pay your company (the exporter), on behalf of the foreign buyer (the importer). When properly drafted, a typical letter of credit is an extremely secure document.  Once issued, the LOC will be “called” as soon as your credit terms are met. For example, if your goods are delivered on “Net 30” terms, and must be paid for 30 days after delivery, the issuing bank will draw and send the funds to you exactly 30 days after the delivery of goods. This ensures that you receive payment in a timely manner.

A Non-Recourse Factor will purchase your Accounts Receivable for a discounted amount of the face of the invoice.  These discounts can be based on a variety of considerations including the credit worthiness of the customer.  Once purchased, the Factoring company will assume all risk of non-payment if they are using a Non-Recourse contract (Recourse contracts will make the client pay back any un-collected debt).  

Which option is best for you?  When considering the ways to mitigate the risk of export trade take into consideration cost, administrative responsibilities, customer relationships, and the ability to cover the risk needed.

David Clark, ITC Board Member
Vice President, Trade Credit and Political Risk Insurance
ARI Global, Inc.