Trade Credit Insurance: Improved Bank Financing Terms
Companies use trade credit insurance to improve their relationship with their lenders. Domestic and export receivables insured with trade credit insurance can be used as collateral for a loan providing excellent security and comfort to commercial lenders. Typically, banks exclude accounts receivable in the borrowing base that are concentrated in too few large customers or are export customers. The good news is that these exclusions are lifted with trade credit insurance on the books. Banks use the security of insured domestic and export accounts receivable to advance capital to the borrower at favorable rates and at a low cost of funds — up to 50 basis points or more below the cost of conventional trade finance rates and advance rates up to 90-95%. At these levels, businesses can raise more capital to be used in any area of the business - expansion, investment, pension fund support, or even returning capital to shareholders. Trade credit insurance used in this way becomes a win win situation for both parties allowing the borrower to receive additional working capital while the bank enjoys the benefits of a more satisfied borrower, and in many cases, a higher return on the capital advanced.
Example: US Export Company
Available Financing Before a Trade Credit Insurance Policy:
Sales: $30,000,000
Domestic Receivables: $2,500,000
Export Receivables: $1,000,000
Domestic Advance Rate: 70%
Export Advance Rate: 0%
Maximum Borrowing Allowed: $1,750,000
If in this example, this company purchases an $80,000 trade credit insurance policy, the bank will increase the domestic advance rate from 70% to 90% and increase the export advance rate from 0% to 90% as follows:
Sales: $30,000,000
Domestic Receivables: $2,500,000
Export Receivables: $1,000,000
Domestic Advance Rate: 90%
Export Advance Rate: 90%
Maximum Borrowing Allowed: $3,150,000
The net effect here is an additional $1,400,000 in available capital at a cost of just $80,000 in premium.
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