Protecting Your International Business Using Export Insurance

In today’s global economy, more small businesses than ever want to sell their products and services to international clients, and although this can offer opportunities for growth, it does also come with its risks. One of the main challenges when doing business internationally is the possibility that foreign buyers might not pay you due to cash flow issues or bankruptcy, which is where export insurance comes in.

In this guide, we will go over what exactly export insurance is, why it matters, and how to reduce risk factors when engaging in international business deals.

What is Export Insurance?

Export insurance is a type of coverage that protects businesses from the risk of not getting paid by foreign buyers. When you sell goods or services to customers in other countries, you want to be flexible and give them the option to pay later, especially if you have an existing relationship and trust that they will pay you on time.

However, getting paid by international customers is not always straightforward, as they might face unexpected financial problems or political issues in their country that disrupt their daily operations. Luckily for you, export insurance helps ensure that in circumstances like these, you will still receive payment even if your buyer is unable to pay.

This is more important than ever, with the OECD expecting a 2.3% growth increase in 2024 for global trade in goods and services.

The main goal of export insurance is to give companies peace of mind when doing business abroad. It covers different types of risks, including commercial risks like buyer bankruptcy or late payments, as well as political risks such as war or government actions that negatively impact operations. By having export insurance, you can focus on growing your business without worrying about unpaid invoices that could cause severe financial difficulty.

Why is Export Insurance Important?

Export insurance could be essential for your business for several reasons, one of which is that it allows you to offer better payment terms to your foreign buyers without risking your own finances. This can make your goods or services more attractive, because buyers prefer suppliers who can provide flexible payment options over those who can’t.

If you invest in export insurance, you can confidently extend credit to customers while knowing that you’re protected against non-payment.

Export insurance can also help you explore new markets with more confidence. You may already know that entering a new country or working with unknown buyers can be nerve-wracking. Export insurance can give you extra confidence when deciding to expand by providing valuable information about the financial health of potential customers and the risks associated with different markets. This data can help you make better decisions about long-term business strategy.

Additionally, export insurance can also improve your company’s overall financial situation by protecting your foreign sales and keeping your cash flow stable, which is vital to keeping your business operations running smoothly. This is particularly important for smaller businesses, with small and medium-sized enterprises (SMEs) accounting for 98% of exporting enterprises in the EU from 2017 to 2022.

Not to mention, banks may view your insured business more favorably which can make it easier for you to get loans if needed, whether it’s to help fulfill large orders or invest in international growth.

Export insurance can also benefit your business by strengthening your relationships with foreign customers. For example, if a buyer faces temporary payment issues but has a good payment record with you, having export insurance allows you to work with the buyer and show some leniency or goodwill instead of cutting ties immediately. This additional financial freedom can help you build stronger business relationships over time.

Minimising Risks When Doing International Business

While export insurance is a valuable tool for protecting your business, it’s also crucial to have processes in place that help reduce the risk of problems arising in the first place. This will help you avoid high insurance premiums and delays while waiting for claims to be settled. You should research and implement strong risk management strategies to lower the chances of encountering bottlenecks, for example, by thoroughly researching potential foreign buyers and their company finances before doing business with them.

You should look into their financial stability and payment history, and many export insurance providers can actually offer credit information services to help assess the reliability of potential customers. If you implement a thorough vetting process for buyers, you can avoid building relationships with companies that pose a higher risk of non-payment.

It’s essential to have clear contracts and agreements with your foreign buyers. These contracts should outline all terms of the sale, including payment schedules and delivery dates, to help prevent misunderstandings and disputes that could lead to payment delays or defaults. It may be worth hiring a lawyer who understands international trade laws to ensure your contracts are solid and enforceable.

Another key factor in reducing risks in international business is effective communication. You should keep in touch with your foreign buyers throughout the entire selling process, from initial negotiations to payment completion. This will also help you identify and address potential issues early on before they become serious problems. It’s also important to be mindful of cultural differences that may affect business practices and communication styles in different countries.

You may also want to consider market diversification as another strategy for reducing your overall risk exposure when exporting goods. You could try spreading your business and clientele across multiple regions and customers instead of relying heavily on one foreign market or buyer. This approach will help you protect your company from economic downturns or political issues in any single market and offer more stable cash flow day-to-day.

Although it can be more complicated to manage relationships with multiple international customers, it’s worth it for the extra peace of mind that your business has multiple income streams. It may be easier to diversify in the near future, with the IMF predicting a 3.3% increase in world trade growth for 2025.

Another essential strategy when it comes to reducing risks related to export-related transactions is having a dedicated business bank account to handle international payments. These banks can offer secure and automated international payment options that make cross-border transactions easier and more reliable.

It’s worth taking time to compare business banking choices to find banks offering advanced features like real-time currency conversion and automated compliance checks that help ensure transactions meet legal requirements, or reporting capabilities to give you better insight into your cash flow. This can help you save time and energy while also reducing the risk of human error and ensuring compliance with complicated financial regulations.

Overall, export insurance is an essential tool for international businesses looking to grow on the global stage. It can help protect you against the risk of non-payment by foreign buyers and allow you to expand your business internationally with confidence. However, it’s worth remembering that buying export insurance should be part of a broader strategy for managing risks to your export business.

You should also perform thorough research on potential buyers, maintain clear communication with your clients, diversify into different regions, and use advanced business bank accounts to reduce the chances of an international payment issue. This will ensure that your insurance costs and premiums remain affordable while helping you build a successful global export business.