- By Kerstin Braun, PhD During his State-of-the-Nation address last January, President Obama called for American businesses to double exports within the next five years. He has repeated his export exhortation several times since. And for good reason. To remain competitive, American businesses—especially small and medium-sized business—have no choice but to export. Ninety-six percent of the world’s population and 75% of its spending power are outside of the US. Meanwhile, the relative size of the US market for goods and services is shrinking. For the economy as a whole, increased exports would help even our lopsided balance of trade create an estimated two million jobs and assure continued prosperity. But as anyone who has ever tried will tell you, exporting is not easy. It requires patience, lots of paperwork, willingness to deal with the bureaucracies of at least two governments and a host of risks. Those risks include market risk, currency risk, political risk, transportation risk and the greatest risk of all – credit risk. Will your company get paid? There is a simple and effective way to make sure your company gets paid: by demanding full payment up front. But that hardly ever works. Unless your product is unique or in extremely great demand, chances are that a competitor will steal your customer away with attractive payment terms. In the global marketplace, demand for payment up front is usually a deal breaker. So how do exporters deal with credit risk? A lot depends on what you are selling, to whom and how frequently. For example, one or two overseas shipments a year favors one approach. Shipping to a new customer in a developing country argues for a different approach. And frequent sales into several foreign markets suggest yet another approach. The most basic kind of credit risk protection offered to US exporters is provided by the Export-Import Bank, the official export credit agency of the United States. The independent, self-sustaining federal agency, now in its 75th year, provides loan guarantees and credit insurance. The “Ex-Im” bank is particularly helpful to first-time or novice exporters. Like other government agencies, the Ex-Im bank requires a fair amount of paperwork, may not offer protection in the countries you’re exporting to, and may require you to prove that whatever it is you are exporting is at least 51% US-made. That might be difficult with electronics, pharmaceuticals, chemicals, etc. Another way to mitigate credit risk is with letters of credit – a letter from your buyer’s bank certifying that the required funds exist and that they have been set aside for payment. They are effective and relatively inexpensive. But letters of credit also have some drawbacks. First, they usually require the services of at least two banks – the buyer’s and the seller’s. The transactions tend to be very rigid in terms of delivery times and locations. But perhaps most problematic of all, letters of credit require customers to tie up funds they could be using elsewhere. Moreover, their use implies the customer’s credit is no good. Even the best salesmen find it nearly impossible to work under such conditions, let alone fend off competitors happy to offer the potential customer favorable terms. The third way to address credit risk, favored by companies that do a lot of exporting, is trade credit insurance. For a small premium, trade credit insurers will guarantee your company is paid by a single overseas customer or many customers in a country, countries or even regions of the world. If a customer defaults, your company still gets paid. It’s up to the insurance company to go after the debtor. Unlike other methods, trade credit insurance is simple, quick, and affordable. But most important of all, trade credit insurance enables your overseas sales staff to offer customers credit terms to compete with those being offered by your competitors. In order to accurately underwrite the risks, the larger trade credit insurers maintain the payment histories of milli