Credit insurance: Grow your exports, cut your risks

You should never have to miss out on business opportunities because of non-payment risks. If you insure your sales, you can make deals with added protection and confidence. And that’s not all—with credit insurance, you can become more competitive, get access to more working capital, and even save time and money.

The risk of not getting paid

Of all the risks you confront as an exporter, non-payment is the most dangerous. At best, it slashes your profits. At worst, it can wreck your company.

The risk of non-payment is usually higher with new buyers whose credit background isn’t well known to you. Long-term, trusted customers present a lower risk, so exporters often feel that these familiar buyers aren’t a potential payment problem—they’ve always paid on time, so why bother with credit insurance?

Unfortunately, this isn’t true. New and old customers alike may fail to pay, for a variety of reasons. The most common ones are as follows:

Your customer may declare bankruptcy
This is the most common situation. Your customer may go bankrupt for a variety of reasons:

• Their own customers have failed to pay them, or there’s been non-payment even farther back along the customer’s supply line (the ripple effect).
• They’ve been paying you on time, but are actually insolvent and borrowing to stay afloat. If they default on their loans, they can go bankrupt without warning.
• A natural disaster has put them out of business. 

Your customer is solvent, but refuses to pay after receiving your goods
This can happen because:

• Justly or unjustly, your buyer deems the goods unsatisfactory and denies payment. 
• The buyer may be defrauding you and never intended to pay in the first place.

Political changes in the country affect payment
Some common causes are:

• The local government imposes new regulations such as currency transfer or conversion controls. These prevent your customers from transferring your money out of the country. They’re ready and able to pay you but can’t.
• War or social unrest destroys or suspends your customer’s business operations.

Your customer could unwittingly be involved in corruption 
Thorough due diligence is especially vital if your customer is in a market that has high levels of corruption. If your customer is implicated in corrupt transactions, they may never be able to pay you. You also might be drawn into the criminal or civil proceedings against the customer. 

Corruption includes crimes such as:

• The customer tries to use bribery to gain a business advantage.
• The customer is implicated in money laundering.
• The customer turns out to have links to terrorist financing.

The surprising costs of not insuring your receivables

Not having credit insurance can cost you in more ways than one. You can go unpaid, of course, but you could also lose out on business opportunities. Let’s look at some of the potential consequences.

Your expected profits turn to red ink
Credit insurance can give you peace of mind because you know you’ll get paid, regardless of your customer’s circumstances. It’s important to consider that one payment default can mean the difference between profit or loss for your whole year.

As an example, let’s suppose you have $1 million in annual sales and a 5% profit margin. That means you’re expecting to make $50,000 for the year. But to keep costs down, you haven’t spent anything on insuring your receivables.

Then, without warning, a customer doesn’t pay a $60,000 invoice. That loss not only erases your expected profit of $50,000, it also puts you $10,000 in the red. 

To eliminate that red ink and get your expected profit back, you’ll need to sharply increase your gross sales for the year—which may be impossible. But if you’d spent a little on EDC Credit Insurance, the policy would have covered up to 90% of your losses.

Use our Insurance Profitability Calculator to find out the potential cost of insuring your receivables in just a few seconds.

You lose business opportunities
The risks of selling abroad are higher than at home, which persuades many firms to stick to the domestic market. This risk aversion translates into lost opportunities and lost business. That’s a shame because research shows that Canadian companies can increase their profitability by more than 100% if they sell to multiple markets. By using credit insurance to manage your risks, you can bid on international contracts with confidence and a sense of security.

You lose working capital
Your company may be setting aside cash to cover losses if a customer doesn’t pay. This approach soaks up working capital that could be better spent on expanding your business. And even if your cash reserve can cover one big default, can it cover two? Or a string of smaller ones?

This approach also affects your ability to borrow. If your financial institution (your bank, credit union or caisse populaire) sees that you’re setting aside cash to cover non-payment risks, they may refuse to increase your line of credit for capital expenditures or overseas expansion.

If you aren’t setting cash aside to cover losses, and you’re carrying bad debts on your books as a result, your financial institution may actually reduce your access to working capital financing. But if you use credit insurance, they know you’re managing risk properly and can leave your credit line intact.

You lose a competitive advantage
One way to avoid buying credit insurance is to ask for upfront payment. But very few international customers will accept these terms because it puts all the risk on them. They are much more likely to demand a flexible payment approach such as open account terms—and your competitors are likely offering this option already.

Open account terms are the most hazardous payment method for you since your customer receives your goods before paying for them. But if you use credit insurance, you can offer open account terms to your customer while managing the risk. The same applies to other kinds of flexible payment options, such as extended due dates or deposits. 

Offering flexible payment terms is a competitive advantage. Whether your customer prefers to pay after receiving your goods or services, or whether they can only offer a deposit, you can rest assured that credit insurance will protect your bottom line.

You waste valuable time and resources
Many companies rely on their own internal resources to do research and credit checks on potential customers. That’s an expense in itself, both in time and money. 

Other firms accept the risk of non-payment as a cost of doing business. But if a major customer goes bankrupt, you could be in severe difficulties overnight. Could you afford time and money to collect on a bad debt in an international market? You’d likely be better off to obtain credit insurance and invest that time and energy in making your next sale.

What credit insurance can do for you

Let’s look at four major benefits to using credit insurance:

• Get security and peace of mind at little cost 
• Be more competitive
• Access more working capital
• Save time and money

Get security and peace of mind at little cost
Whether your business is large or small, EDC has an insurance program that will suit your needs and keep you and your company protected—and getting insured is probably easier and more affordable than you think. Here’s how to do it:

• If one unpaid invoice can mean the difference between profit and loss, consider EDC’s Select Credit Insurance. It provides short-term coverage and is an ideal solution when:
  • You’re a new or occasional exporter.
  • You’re exploring new markets and business relationships with a small number of customers.
  • You need fast and simple coverage and want to apply for it online.
  • You need to insure transactions under $1,000,000.
• If your needs are larger—for example, having invoices worth nearly half your balance sheet—you can cover all your unsettled transactions with EDC’s Portfolio Credit Insurance. Like Select Credit Insurance, it covers up to 90% of your losses if a U.S. or international customer doesn’t pay. 

Credit insurance is a cost-effective way to protect your sales and bottom line. To find out which credit insurance solution is right for you, use the tool below.

Be more competitive
You can increase your competitive advantage by offering flexible payment options to potential customers. This flexibility comes from knowing your company is protected against non-payment—whether customers offer partial payment upfront or prefer to pay once they have your goods or services. Credit insurance takes away the worry, so you can take on your next international contract with confidence and a sense of security.

Access more working capital
If you don’t insure, you’re assuming all the credit risk of doing business. Your financial institution’s credit department will see that as a liability when determining the size of your loan or credit line. 

When you insure your company’s receivables, your financial institution knows that up to 90% of your invoices will be covered. In this situation, your banker can offer you better borrowing options to finance capital expenditures or overseas expansion. Here’s why:

• Financial institutions lend against your receivables at a rate called the margining rate. The most common rates are 75% to 85% on Canadian invoices, 65% to 75% on U.S. invoices and 0% on international invoices. That’s what you can expect if you have no credit insurance.
• If you have EDC Credit Insurance, which secures up to 90% of your receivables, it’s a different story. In this case, your financial institution could margin your insured invoices at 90% of their value. That could make a big difference to the size of your credit line.

This table shows what that can mean for a company’s working capital:

Save time and money
It’s always necessary to carry out due diligence on new customers. But in international markets, reliable credit information about a potential buyer may be hard to obtain. Chasing it down uses time and energy that you could better spend elsewhere. Moreover, you may be unable to find trustworthy information about the customer’s creditworthiness no matter how long you work on it.

When you use EDC Credit Insurance, we become part of your credit management team. We can quickly and confidentially verify whether your customer is insurable. In some cases, we can approve a customer in as little as 10 minutes, so you can set your buyer’s payment terms almost immediately.

If your U.S. or international customer won’t pay you, we will

At EDC, we know international business can be risky. That’s why we’re here—to reduce your risks when you expand abroad and to help make sure you get paid.

Schedule a call with one of our trade advisors and find out how to protect your bottom line with EDC Credit Insurance.

Are you new to EDC?

Call us at 1-800-229-0575 or tell us how we can help here. 

Are you an existing customer?

Contact your EDC account manager about any additional support you require. For assistance with insurance products and online portals call 1-866-716-7201 or contact us by email at support@edc.ca.

Appendix: International payment terms

Cash against documents (CAD)
This is when the shipping documents, transferring the title of the goods, are sent to a financial institution or to an agent acting on your behalf, with instructions to hand the goods over when your customer has paid cash.

Payment prior to shipment (PPS)
This occurs when your customer pays their invoice before you manufacture and/or ship the product. Upon receipt of payment, the goods and all the necessary documents are shipped directly to your customer.

Cash on delivery (COD)
This means your customer pays cash as soon as they receive the goods. Only then do you turn over the title to the goods. 

Documents on payment of a sight draft (DOP/SD) 
This is also called a demand draft. Documents are only released to your customer if they make an immediate payment on demand when they’re presented with the documents (at sight).

Letter of credit (LC)
This is a written undertaking given to you by a bank (the issuing bank), which is instructed by its customer (the applicant, also known as the buyer), to pay when presented with the required documents or at a future date (by accepting a draft). Payment is made to you through the bank. Letters of credit are generally final and binding.

Open account terms
This is an agreement that allows the customer to pay after receiving the goods. The credit period can be short such as “payment upon receipt.” However, more common credit terms vary from 15 to 180 days.