Benefits of Credit Cover
Protection for the debtor asset or the balance sheet.
Possible access to information on credit rating of foreign buyer.
Access to trade finance
Protection of profit margin
Advice on customers and levels of credit.
Disciplined credit management.
Assistance and /or advice when debts are overdue or there is a risk of loss.
Provides confidence to suppliers, lenders and investors.
Good corporate governance
Contract risk and credit risk are the part of international trade finance and are quite
different from each other.
A contract risk is related to the Latin law of "Caveat Emptor", which means "Buyer Beware" and refers directly to the goods being purchase under contract, whether it's a car, house land or whatever.
On the other hand a credit risk may be defined as the risk that a counter party to a
transaction will fail to perform according to the terms and conditions of the contract, thus
causing the holder of the claim to suffer a loss.
Banks all over the world are very sensitive to credit risk in various financial sectors like
loans, trade financing, foreign exchange, swaps, bonds, equities, and inter bank
transactions.
Credit Insurance
Credit Insurance is special type of loan which pays back a fraction or whole of the amount
to the borrower in case of death, disability, or unemployment. It protects open account
sales against nonpayment resulting from a customer's legal insolvency or default. It is
usually required by manufacturers and wholesalers selling products on credit terms to
domestic and/or foreign customers.
Benefits of Credit Insurance
1. Expand sales to existing customers without increased risk.
2 Offer more competitive credit terms to new customers in new markets.
3. Help protect against potential restatement of earnings.
4. Optimize bank financing by insuring trade receivables.
5. Supplement credit risk management.
Payment Risk
This type of risk arises when a customer charges in an organization or if he does not pay
for operational reasons. Payment risk can only be recovered by a well written contract.
Recovery can not be made for payment risk using credit insurance.
Bad Debt Protection
A bad debt can effect profitability. So, it is always good to keep options ready for bad
debt like Confirmation of LC, debt purchase (factoring without recourse of forfeiting) or
credit insurance.
Confirmation of LC
In an international trade, the confirmation of letter of credit is issued to an exporter or
seller. This confirmation letter assures payment to an exporter or seller, even if the
issuing bank defaults on its payment once the beneficiary meets his terms and conditions.
Factoring and Forfaiting
Where debt purchase is without recourse, the bank will already have advanced the funds
in the debt purchase transaction. The bank takes the risk of nonpayment.
CAclubindia
