The Risk of Foreign Receivables and How Insurance Can Help
What Are Foreign Receivables?
Foreign receivables are the accounts receivable due and payable from a buyer located outside of the seller’s country. In terms of business growth, being able to expand outside of your business’s country of origin is ideal, but foreign partnerships and business endeavors come with their own set of risks. Risks such as enforceability, collectability, political risk, currency risk, and credit risk, are just some of the risks associated with selling internationally.
In addition to the increased risks with selling internationally, foreign sales tend to have a longer cash conversion cycle. Because these sales tend to take longer to convert to cash, companies are often faced with the need to finance their working capital requirements which often leads to an unwelcome realization… banks do not like foreign receivables as collateral.
How Trade Insurance Can Help
Trade credit insurance, also known as AR insurance, is often a solution to this issue. By insuring foreign accounts receivable, companies can reduce their risks associated with selling internationally, and provide those benefits to their bank to entice them to lend against this segment of collateral. Terms and pricing will vary but generally speaking, advance rates are comparable to uninsured domestic accounts receivable (often higher) and eligibility, also comparable to domestic accounts receivable, is often limited to 90 days from invoice date unless exceptions are approved by the lender.
Trade credit insurance is still a relatively unknown type of insurance in the US but its popularity is growing. As businesses continue to look for growth outside of their home region, they are finding that trade credit insurance is an effective tool to help mitigate increased risks and improve access to working capital financing.