Trade Credit Insurance: International Trade & Letters of Credit
Companies that sell overseas are charged with the task of obtaining accurate and verifiable information on the buyers they do business with. Information flow from other countries tends to be a challenge for many sellers, and to remedy this problem, many businesses prefer to enter into overseas transactions using Letters of Credit as a form of payment guarantee. LC’s have been used for centuries to facilitate payment in international trade since trade transactions are bank guaranteed, provided of course, that the documents are accurate, presented on time, and comply with the terms and conditions of sale. A challenge for businesses using LC’s is that sometimes the parties fail to perform properly causing the LC to expire leaving the seller with no form of protection. Letters of Credit are not only a time consuming process, but they also tend to be costly for the party absorbing the fees.
Trade credit insurance is an excellent alternative to Letters of Credit for several reasons. For one, it’s less expensive. Second, trade credit insurance covers shipments under the policy for an entire year where LC’s must be negotiated and drawn up for each shipment made. Third, and probably most important, a trade credit insurance policy allows the seller to ship to the buyer on open terms, which enhances the relationship between the parties, allowing the buyer to free up their credit lines and leverage their purchasing power.
Think about your own business. If given the choice between two international suppliers ready to do business with you, where one is extending terms and the other is using Letter of Credit, which would you prefer?
Have a question or comment about trade credit insurance? Feel free to post your inquiry on this blog or contact Jack Trama directly by clicking here.
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