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Trade Credit Insurance: Improved Bank Financing Terms

Trade Credit Insurance: Improved Bank Financing Terms

Trade Risk Strategies

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.

Absent of a policy, banking underwriters typically exclude accounts receivable from the borrowing base, particularly excluding receivables that are concentrated in too few large accounts. Export receivables are also excluded, but the good news is these exclusions are immediately 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 as high as 90-95%.  At these levels, businesses can raise more capital for use in any area of the business – expansion, investment, pension fund support, or even returning capital to shareholders. Trade credit insurance used as a borrowing tool becomes a win-win situation for both parties, with the borrower receiving additional working capital while the bank enjoys the benefits of a more satisfied client, 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 this company were to purchase an $80,000 trade credit insurance policy, the bank would increase the domestic advance rate from 70% to 90% and increase the export advance rate from 0% to 90% as follows:

Available Financing After a Trade Credit Insurance Policy:

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 for trade credit insurance.

While advance rates and policies vary from bank to bank, the borrower is certain to receive a more attractive package from a lender with a trade credit insurance policy securing the accounts receivable collateral for the loan.

Have a question about trade credit insurance? Feel free to call us at 1-844-315-4985 or contact us directly by using the form to the right.

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