When an exporter exports their goods or services, there are some concerns which are brought to light, first being the creditworthiness of the foreign importer. If the exporter does not get paid or if the importer turns insolvent, then it causes commercial risk. Such conditions can cause financial troubles to the exporting entity. As a result, to safeguard the exporter from such mishaps, it is necessary to ensure the solvency of the entity, with whom the exporter is dealing with.
Such behavioural aspect is required for the export business because it is never feasible to get the financial information as a result of the local culture and practices. Also, the good financial statements do not ensure that the buyer will also make the timely payment. Credit risk should be assessed as accurately as possible, and also it should be covered with proper provisions, like trade credit insurance.
A trade credit insurance is an important risk management tool which helps in covering the payment risks which comes from the delivery of goods or services. As per the policy, the trade credit insurance entity usually insures against a portfolio of buyers and pays a pre-decided percentage of receivable to the seller, which may stay unpaid due to bankruptcy, insolvency, or defaulting.
This trade credit insurance seeks coverage against delays in payment and non-payment by its buyers. The premium of insurance is decided based on the annual turnover and credit risk of the buyer which in turn insures exporter would get protection up to a decided percentage against any damage or loss which may be caused due to the failure to make payment or late payment by buyers.