Things change. Markets go up and down; once valuable commodities become obsolete; governments are in or out; currencies fluctuate. Uncertainties in a market can wreak havoc for small businesses that export. What’s a company to do?
Early civilizations bartered directly for goods and services, exchanging animal skins for food, tea for spices, salt for silk and so on. In the 7th century B.C., two ancient kingdoms in Lydia (modern day Turkey) and China used metals to cast coins. Currency, a medium of exchange, was born.
Like everything else, currency has value and in this case, a currency’s value is measured against the value of other currencies. The exchange rate of one currency for another is affected by a myriad of factors including supply and demand of the two currencies, outlook for inflation, confidence or loss-of -confidence in a market and other factors. When a country’s currency depreciates in relation to the U.S. dollar, U.S. products and services become more expensive in that market and it may be difficult or impossible for the foreign buyer to meet the negotiated price on the invoice. Imagine an exporter has sold goods or services on 90-day credit terms into a country where the currency starts to depreciate and continues a downward spiral over the course of the outstanding invoice. In this situation there are oftentimes three outcomes:
- The buyer is unable to pay the invoice;
- The buyer delays paying the invoice beyond the negotiated credit terms hoping that their currency will rebound; or
- The buyer will short pay the invoice, asking the seller to discount the invoice
Similarly, political unrest, state actions like nationalization or deteriorating relationships between governments can have a severe impact on small business exporters by disrupting the buyer’s ability to pay or restricting import of a product that is already in transit.
The good news is that export credit insurance from the Export-Import Bank of the U.S. (EXIM) protects small business exporters from these threats and more. With export credit insurance, an exporter is insured against both commercial and political risks including:
- Protracted default
- Non-payment due to currency depreciation
- Currency Transfer Risk/Currency Freeze
- War, Revolution, Insurrection, Expropriation
- Cancellation of an Import of Export License
In addition to providing coverage for commercial and political risks, export credit insurance can increase your borrowing base by covering your foreign receivables, and can be used as a marketing tool, empowering you to offer credit terms to new and existing foreign buyers with the assurance that you are protected against non-payment.
Want to learn more? Download the Guide to Export Credit Insurance and call your Export Regional Finance Center today!