Knowing when to pop the cork

The first reaction of most finance directors when their company wins a new foreign order is to crack open the champagne. The second should be to get some good export credit insurance. But only half the companies doing business abroad take out any form of special insurance.

Those who don’t should think again. Trading overseas can often throw up a range of non-payment problems which those who have never done business abroad would find difficult to imagine. Civil war, natural catastrophes and unstable economies can all add to the complications of getting the cash in after the services or goods have been shipped out.

If you are operating from the UK, the only way to protect yourself against such risks is to take out export credit insurance. Dick Watt, assistant director for export risk at the insurance specialists Trade Indemnity, says: “The insurance covers any aspect of political risk which can involve a country running out of hard currency to a whole range of government actions. Other examples could be seizure of assets, civil war, the complete breakdown of an economy, revocation of a licence or perhaps cancellation of contract.”

Export credit insurance can give a company a secure base from which to expand into new markets while at the same time allowing the business to monitor its investments abroad. “Unless you have lawyers in every country in the world then it’s very difficult to keep track of how foreign firms operate,” says Bridget Taxy, general manager of the export insurer Coface LBF. “Companies are often dealing with countries where they don’t understand the culture. They don’t know how far to go (with bad debts) before it becomes a serious issue.”

Cultural differences are further complicated by foreign languages whose subtle differences of expression can lead to misunderstandings. Even keeping abreast of a business’s progress can become daunting if you have to sift through the foreign press to find out what is going on in the marketplace.

At a sophisticated level, export credit insurance allows companies to transfer those chores to the insurer who has experts familiar with dealing with foreign markets. It could give you important resources in the UK when you don’t have a foreign base yourself, or have no idea of how to get in on the game.

At its simplest level though, export credit insurance allows the insurer to step in when the customer ducks out. If your credit terms are, say, six months, then the insurers will pay out sometime after that period has elapsed. The level of cover you take out with the insurer will determine how much money you will be able to reclaim when things go wrong. While this will sound like common-sense to many, others have not even considered it.

A recent survey conducted by the credit management company NCM revealed that only 51% of companies trading overseas used the insurance – the same number as in 1996. Colin Foxall, chief executive of NCM, commenting on the results, says: “It is disappointing that the survey again shows too many exporters still willing to risk bankruptcy from bad debts at a time when world trade, changing at a bewildering rate, demands fundamental balance sheet protection.”

Some companies, it appears, are just plain lazy. The fear of corporate complacency when it comes to the real business of dealing with bad debts has been exorcising the insurers’ trade body, the Association of British Insurers.

The ABI is concerned that businesses all too often ignore the problems which bad debts may cause. Spokesman Malcolm Tarling says: “If companies haven’t had dealings in bad debts they tend to be unaware of the problems they can cause. We are very keen to promote the insurance as a valuable added security to protect against bad debt. It helps a business to expand and grow as they can rely on the security it offers. Like all insurance, export credit insurance provides companies with a safety net.”

Complacency is one thing, but ignorance is another. One of the problems highlighted by the NCM survey was that many companies simply don’t appear to know that the insurance exists. Tarling says: “Firms don’t know about the insurance and are unaware they need protection against foreign bad debts. There is a lack of knowledge concerning the insurance and a lack of awareness that the policy is out there,” agrees Tarling.

While you would expect insurers to over-egg the gravity of the problem – more firms taking out policies means more money for them – others believe many could be suffering because of their lack of knowledge. Smaller companies, in particular, who are perhaps operating overseas for the first time are the least likely to be protected from bad debt problems.

David Arnold, insurance partner at Ernst & Young, says: “Personally it’s one of the first insurances that comes to mind and I would think most people dealing internationally should be aware of it. While I would think that they should be aware, especially in large firms, smaller firms may not be. Perhaps it is a specialist knowledge that not everyone has access to.”

Arnold strongly recommends businesses consider adopting such cover where it is appropriate. “Companies definitely need some insurance in such a volatile economic cycle of recession and boom. I think it an area that is very important as debt collection is fundamental to any business,” he explains.

The view that the smaller company is the victim of foreign bad payers is supported by the fact that larger commercial organisations are more able to protect themselves against risk by using their complex geographical structures to their best advantage. They are able to trade with their foreign subsidiaries and are therefore protected from dealing with unknown foreign companies.

Watt says: “I am surprised that as many as 51% of companies have the insurance. In international trade, money often goes from one member of a group to another member of the same group operating in a different country and therefore the insurance is not necessary. A parent company in the UK may have links with a small firm in the country (with which it is trading) and that firm will simply apply for domestic insurance cover.”

Taxy is also sceptical and believes that many companies have previously been deterred from taking out a policy because insurers have been too greedy. She blames insurers who have concentrated purely on the financial gain behind the insurance policies without offering the high degree of hand-holding that companies often need. “Past thinking concentrated too much on the financial side. When people took out the insurance they still had to do the credit checks themselves and worry about the debt collection,” he says.

Companies should also be aware that the same types of bad debt problems they face in the domestic market are waiting for them when they get their new overseas contract. When you are dealing with any new customer, it is impossible to predict whether they are going to be a bad payer or not, so some kind of financial cushion is advisable.

And it is not just the new customers that you should be keeping your eye on. “Often it is the companies you grow comfortable with that let you down. Companies should not become unwittingly complacent because I don’t think there’s such a thing as a blue-chip company when it comes to paying bills,” says Watt.

And he does not think much of government agencies either. “Export credit insurance is even more important if you are dealing with a government buyer. Governments tend to be a lot less moral than commercial buyers as they can make the kind of unpleasant decisions that a company could not make and are still able to stay active as a buyer in the market,” says Watt. In other words, they can simply not pay you and get away with it.

Export credit insurance can also protect companies against domestic circumstances which could contribute to the a downturn in their overseas trading figures – particularly the current high price of sterling. But the effects of this will not impact on the export credit insurance market for another couple of years. Export figures are still surprisingly high in some sectors, quite often because many companies are tied into lengthy contracts which they are obliged to fulfil, making an immediate backlash unlikely.

Robin Ogleby of the government agency the Export Credit Guarantee Department says: “High sterling has not really made an impact on the market at present.

It will take a long time for the effects to filter through and it could even take several years.” But one thing is certain – those with export credit insurance will be better protected.

Most companies looking to take out export credit insurance often go direct to an insurer, but they could get a better deal from a knowledgeable insurance broker. FDs will have to pick their brokers with care if they are to get a good deal. A recent survey found that while 80% of brokers knew what credit insurance was, only 10% said they had a “comprehensive” knowledge.

Both Taxy and Watt recommended that companies looking for export credit insurance should approach credit insurance brokers and the big broking houses who could give them an independent assessment of what kind of policy would suit their individual needs. “We all try to say our protection is best for everyone, but it can suit different people in different ways.

Brokers can help them decide on the right policy,” says Watt.

The cost of the insurance can vary enormously, depending on the company, where it is trading and the insurer. Coface LBF, for example, says it would be unlikely to look at premiums under #5,000. It says it would insure from as little as 0.2% of a company’s turnover to 1.5%. ECGD, on the other hand, is trying to attract smaller firms and may look at insuring individual export contracts worth as little as #25,000.

Whoever the finance director of a company decides to take out insurance with, they should make sure they get the right deal for the business they are in. As well as checking out the price, they need to make sure the insurer will pay up when the company needs them to.

Coface LBF, for example, has developed an “Open Trade” product, which it describes as a full but simple insurance service. It combines insurance with credit checks and debt collection, promising that debts become claims after only five months. The former government agency NCM also agrees that tailoring policies to what companies require is the way forward. Following its privatisation in 1991, NCM now offers two services: the Global Policy, and “Compact” service for the lower end of the market. NCM’s spokesman Gary Hicks says the policy has paid off. Since 1991 NCM has increased the amount of short-term trade it protects from #13bn to #30bn, showing the market has responded to flexible deals.

Even the Export Credit Guarantee Department, which sold its short-term business to NCM, is getting in on the act. The ECGD says: “Our horizon of risk is much greater than the private sector as we can be on credit for periods of 15 years or more. We deal with longer and larger risks but we are also trying to help smaller exporters.” That means dealing with #25,000 contracts quickly. Lines of credit have been established through banks and a certain level of pre-underwriting for regularly used companies now exists.

With such choice now available, finance directors have never had it so good. So when the next new foreign contract comes in, it could be time to put the champers on ice – at least until you’ve made that call to your specialist export insurance broker.

32% of UK companies trading in the European Union experience payment delays and bad debts.

Italy, Ireland and France increased their incidence of late payment during the second quarter (compared with Q1).

Bad payments have increased in the rest of Europe, with 15% of companies saying that CIS (Russian Federation) has a poor record.

Asia, Africa, North America and Latin America are the best payers. Less than 1 in 10 companies experience delays/ bad debt, compared to over 1 in 3 in the EU.

USA and EU bad debts are mainly caused by insolvency problems and not political risk. Firms are simply not able to pay up.

South East Asia (eg China, Hong Kong, Philippines, Malaysia), India and the Middle East (eg Saudi Arabia and Oman) are considered risky.

Sources: NCM, Reuters, Smith de Wint Trade Indemnity’s Quarterly Financial Trends Survey.