Scenario - Insuring Foreign Receivables
As mentioned in our prior post about insuring domestic receivables, it is common in today’s lending environment to be able to borrow against uninsured domestic receivables that are due and payable within 90 days, however, foreign receivables are generally excluded from availability. Once the restrictions are accounted for, the lender will generally advance 70% - 80% on the receivables deemed eligible. Below is an example of a typical borrowing base with both uninsured domestic and foreign receivables.
Without Insurance
Gross Domestic Accounts Receivable $7,000,000.00
Less: Ineligible Accounts Receivable $2,100,000.00
Net Eligible Domestic Accounts Receivable $4,900,000.00
Maximum Advance on Eligible Domestic A/R (75%) $3,675,000.00
Gross Foreign Accounts Receivable $3,200,000.00
Less: Ineligible Foreign Accounts Receivable $3,200,000.00
Net Eligible Foreign Accounts Receivable $0.00
Maximum Advance on Eligible Foreign Accounts Receivable (0%) $0.00
Total Margined Eligible Accounts Receivable $3,675,000.00
Now, let’s look at the same borrowing base and assume foreign receivables are inured. By using insurance, lenders will often advance up to 90% on the eligible foreign receivables and will include previously ineligible items such as receivables with longer payment terms and concentrations. For this example, assume domestic receivables are not insured. As shown below, eligible collateral increased by $2.8 million and availability increased by $2.5 million.
With Insurance on foreign AR only
Gross Domestic Accounts Receivable $7,000,000.00
Less: Ineligible Accounts Receivable $2,100,000.00
Net Eligible Domestic Accounts Receivable $4,900,000.00
Maximum Advance on Eligible Domestic A/R (75%) $3,675,000.00
Gross Foreign Accounts Receivable $3,200,000.00
Less: Ineligible Foreign Accounts Receivable $400,000.00
Net Eligible Foreign Accounts Receivable $2,800,000.00
Maximum Advance on Eligible Foreign Accounts Receivable (90%) $2,520,000.00
Total Margined Eligible Accounts Receivable $6,195,000.00
Conclusion: By insuring foreign accounts receivable, companies are able to reduce the risk of non-payment on their accounts receivable, which is often the largest asset on their balance sheet, and at the same time increase their funding capability to finance their working capital need.
About Impello Global
Impello Global is a trade finance advisory boutique and specialty trade credit and political risk insurance brokerage, headquartered in Seattle, Washington. We specialize in brokering trade credit and political risk insurance and also provide advisory services to companies and lenders who are looking to expand their global trade capabilities. Please visit our website at www.impelloglobal.com or contact us directly at info@impelloglobal.com.