Trade Credit Insurance vs. Letters of Credit

 

Trade Credit Insurance - Better Than Letters of Credit for Reducing Business Risk

 

What is a letter of credit?  

A letter of credit is a document issued by a financial institution — typically a bank — that guarantees a buyer’s payment to a seller will be received on time and for the correct amount. This means that in the event the buyer is unable to make payment on a purchase from the seller, the bank is required to cover the outstanding amount.

Trade credit insurance (also known as “accounts receivable insurance” or “business credit insurance”) and letters of credit (L/Cs) have one trait in common: Both lower the financial risk involved in international trade. But that’s where the similarity ends.  

Letters of credit are costly and burdensome to the exporter’s customer. They freeze a portion of the buyer’s available credit and they’re specific to one transaction. For today’s global business, letters of credit are not the protection of choice.

 

Trade credit insurance is a better alternative to letters of credit because it:

• Offers policyholders affordable assurance that they will be paid for goods or services they’ve already provided — without placing the burdens of letters of credit on customers

• Allows export businesses to safely offer open terms and more aggressive credit limits to their customers worldwide, increasing foreign customer loyalty and sales

• Enables the exporter’s bank to consider otherwise ineligible foreign receivables as collateral

• Helps policyholders qualify for much larger credit lines on better terms

• Frees companies to expand their business into new and emerging markets in a safe and cost-effective manner