Using Export Credit Insurance, Myths vs. Truths in Exporting, and Questions to Ask Yourself if You Have Yet to Get Paid by a Chinese Company

The previous post on this blog presents ten questions questions every U.S. exporter should ask according to the Export-Import Bank of the United States (EXIM), an independent government agency that assists in financing and facilitating U.S. exports of goods and services. The post references EXIM's Multi-Buyer Credit Insurance, which EXIM says "is a policy that protects an exporter's accounts receivable and has significant benefits. The protection of a policy equips businesses with the confidence necessary to enter new markets, increase sales in existing ones, and chart a path forward with margins they can depend on."

EXIM explains small businesses use credit insurance to:

• Extend credit terms to foreign customers.
• Insure against nonpayment by international buyers.
• Cover both commercial (e.g., bankruptcy) and political (e.g., war or the inconvertibility of currency) risks.
• Arrange financing through a lender by using insured receivables as additional collateral.

Benefits of EXIM's Small Business Multi-Buyer Credit Insurance include:

• Risk reduction: safeguard against catastrophic losses from buyer nonpayment. It covers up to 95 percent of sales invoices.
• Increased competitiveness: unlock the ability to offer buyers the credit terms necessary to expand into new markets and boost sales with existing customers with confidence. In turn, buyers do not need to pay cash in advance and hinder their cash flow.
• Improved liquidity: accelerate cash flow by borrowing against foreign receivables.
• Credit management expertise: ease the burden of credit risk management by leveraging EXIM’s international expertise.

EXIM then provides the following point to explain how its credit insurance works:

• Policies cover both commercial and political losses at 95 percent.
• There are no application fees or minimum premiums. A one-time, refundable advance deposit of $500 is required to issue the policy.
• Premiums are paid no later than 30 days after the month of shipment.

This video provides a brief explanation how EXIM's credit insurance works.

Exporting means undertaking a number of risks. Not all risks are the same, however, and there are myths some business owners may mistakenly believe, which may prevent them from creating an export plan for their business. To dispel these myths, EXIM created a document presenting six truths about exporting.

While each truth in EXIM's document is valuable, I appreciate that in responding to the myth, "I'm too small to go global," the agency explains: "Nearly 42% of all U.S. exporters have fewer than 19 employees."

While I generally agree that "With the right tools, selling internationally is routine" is an accurate truth to the myth of "Getting paid is cumbersome and I'll lose my shirt," not all international markets are the same. For example, Dan Harris with Harris Bricken, an international law firm, writes in a post published on the China Law Blog that "China has all sorts of rules that apply to foreign conversions and remittances." His post looks "at some basic due diligence that can identify or avoid defaults or delays in money transfers out of China."

If you have yet to receive payment, Mr. Harris presents the following eight questions you should ask yourself "before you rush to blame the Chinese company":

1. Do you have any idea what taxes should have been paid by the Chinese company and what taxes should be deducted from the remittance itself?
2. Was your contract exempt from the kind of prior registrations required by the tax authorities?
3. Do you even have an enforceable contract against the Chinese company in China?
4. Has an independent person gone down to the Chinese company's bank branch to confirm what their particular requirements and concerns are?
5. Did you withhold any deliverables until you received all or substantially all of the money out of China?
6. Did you ask the Chinese company to provide examples of previous successful foreign remittances?
7. Does the business license of the Chinese company allow for foreign trade and thereby indicate that foreign remittances would not be unusual in the ordinary course of business?
8. If you're dealing with a State Owned Entity (SOE), or a very large company of any kind, did you understand all of the internal approvals that company would require before a payment could be authorized and did you appreciate how long this might take?

Suggesting business owners need to take responsibility for their failure to understand the risks of doing business in China, including crafting strategies to mitigate those risks, Mr. Harris says: "If the answer to any one of these questions is 'no,' don't blame the Chinese company."

What recommendations do you have in protecting your company's accounts receivable when exporting to foreign markets? Do you agree with EXIM's truths to dispel exporting myths? If you are exporting to China, what advice do you have for getting paid?

UPDATE

A reader of this post sent me a message saying: "For more impartial information on export credit insurance (trade credit insurance), you may want to refer to The International Credit Insurance & Surety Association (ICISA), which published A Guide To Trade Credit Insurance, a practical and accessible industry-wide reference guide on trade credit insurance." The reader also recommends utilizing the resources provided by The International Union of Credit and Investment Insurers (Berne Union), an international not-for-profit trade association representing the global export credit and investment insurance industry.

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.