Exporters often find that banks require international receivables to be insured if they are being used to collateralize credit lines. A shipper’s first inclination is likely to apply to the Export-Import Bank of the United States (EXIM), a government agency, for that coverage—and for a good reason. EXIM will often insure international transactions of very small companies that are just not on the radar of private insurers. It is also sometimes willing to insure receivables from ultra-high-risk markets such as Venezuela, something the private sector is reluctant to do.

On the other hand, there are reasons for exporters to consider private trade credit insurance. For one thing, not every U.S. export is eligible for EXIM coverage. Exports must meet U.S. content requirements to be eligible to receive support from government programs. For exporters whose products don’t meet that threshold—if they are re-exporting products primarily made elsewhere, for example—they’re fresh out of luck when it comes to benefitting from EXIM programs.

Anther reason to consider EXIM alternatives is that private insurers add value in the form of information, advice and technological innovations that benefit their customers. And for exporters interested in trying trade credit insurance on for size, now may not be a bad time. Rates in many areas are rather low—but they won’t stay that way forever.

“Premiums are pretty affordable right now,” says David Huey, president and regional director, NAFTA, at Atradius Credit Insurance. “Lower premiums have encouraged more U.S. exporters to look into trade credit insurance.”

“We have seen pressure on premium prices over the last couple of years,” says Kerstin Braun, executive vice president for Commercial Development at Coface North America. “However as economic risk increases, especially in sectors such as oil and gas and steel, premiums will increase.”

At this point, around 3 percent of U.S. exporters use trade credit insurance, according to James Daly, regional director at Euler Hermes North America. “That’s compared to around 15 percent in Europe,” he adds. “The psyche of the U.S. company is often more aggressive than elsewhere and they are prepared to take on more risk.”

Why consider trade credit insurance? It’s all about balancing the costs of doing business with the risks.

With more trade being conducted on open terms, the possibility of bad debt write-offs increases, and along with it a major hit to a company’s profitability and cash flow. Accounts receivable often represent more than 40 percent of a company’s assets.

According to the Euler Hermes Global Index of Business Failures, the rate of U.S. business insolvencies has somewhat recovered since 2008, but 2014 still saw 29,965 business failures, only marginally lower than the number reported at the height of the Great Recession. Exporters to risky markets must consider the state of economies overseas.

Alternative risk management mechanisms to trade credit insurance include self-insurance, in which a company segregates a pool of capital to cover possible defaults; factoring, which involves selling accounts receivable at a discount; and demanding a letter of credit, essentially a bank guarantee of payment. Obtaining letters of credit is cumbersome and expensive, and if buyers expect open terms, they can be a deal killer.

“Private companies insure receivables and add value to the process to make it smoother and safer and to help exporters better manage their portfolio of buyers,” says Braun.

As with many other business processes, private trade credit insurance has migrated to the digital world with the ability to apply for insurance and manage accounts through a web browser or smartphone app. At Coface, exporters have the ability to apply for insurance and request amendments to coverage over applications on their handheld devices. They are also provided visibility to their customers and coverages through a dashboard that they can view on those same devices.

Euler Hermes recently launched a product called Simplicity that is directed specifically at small businesses. Under a Simplicity policy, all domestic and foreign buyers are covered at a fixed premium rate, with defaults paid at 60 percent of the debt. Coverage for less risky buyers can be bumped up to as much as 90 percent. The policy also includes access to the Euler Hermes proprietary database of companies worldwide as well as an online policy management portal.

“Simplicity is there to provide protection to small and medium enterprises without the traditional administrative burden,” says Daly. “It’s a tool that allows entrepreneurs and small businesses to move into growth opportunities without all the sleepless nights.”

Trade credit policies differ from property, casualty and automobile policies in that they are highly interactive, notes Daly, and it pays to be a sophisticated buyer. Unlike other insurance policies that sit in a drawer until they are needed, trade insurance customers are in regular dialog with their insurers about their sales prospects and the credit quality of their customers.

Companies new to trade credit insurance therefore find it advantageous to arrange coverage through an intermediary, at least at first. “Specialist brokers can advise companies where they belong,” says Huey. “They can steer them to the right solution instead of customers listening to different sales pitches.”

Private trade credit insurers plan on further digitizing their operations and processes in an effort to attract more exporters to their products, especially in the United States. “We will continue to deliver solutions to customers in a virtual environment instead of having to deal with insurance companies through the old fashioned paper and quill method,” says Daly.

The next frontier has trade credit insurance companies exploiting the phenomena of big data and artificial intelligence, even extracting information about potential buyers from sources like online social media. “We see value in combining the data we traditionally collect with information about the payment history of companies that can be found on websites like Yelp,” says Daly. “In the future, we see combining different types of data to become more productive and competitive. We think we’ll be able to offer insurance products at better prices in the future when we can discern patterns that we can’t see today.” n