It was another surprise to see Japanese yen going down to another record low (near 120 Yen/ USD) in the past week. The implication is interesting. Read more
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A Letter of Credit is widely acknowledged as being the most reassuring guarantee of payment in international commercial transactions.
Commonly referred to as an LC, it ensures the settlement and successful completion of a commercial contract between an importer/buyer and an exporter/seller by the bond of their respective banks.
So, how can a credit insurance policy be an interesting alternative to a Letter of Credit today?
As a result of frequent questions from companies who have regularly used this type of payment security, we have carried out some research among our clients regarding their view of a Letter of Credit.
Overall we came to the same conclusions and noted similar drawbacks.
Most agree that Letters of Credit are a secure solution (compensation in full, without delay). However:
- There are some constraints: a Letter of Credit can complicated and take a long time to implement; completing the paperwork can be very time-consuming, attention to exact detail is essential and it can be costly.
- There are some concerns: whether the issuing bank confirms the Letter of Credit or not (buyer’s bank) is a real problem, especially when dealing with countries experiencing political instability.
Based on this evidence, it has been possible for us to demonstrate that credit insurance policies that are properly structured can provide far more flexibility at significantly lower pricing.
Only export or innovative businesses are optimistic in the current climate!
There can be no doubt: at a time when many European economies are ailing, the export market, particularly the large export market, is becoming a path to achieve growth for a large number of companies, irrespective of their size.
With Africa’s average GDP standing at 4.5% and can exceed 10% in certain countries such as Angola, the African economic pace is attracting companies willing to invest.
By trading in Africa, companies need to recognise they will deal with new risks which may require a precise analysis of the situation, notably in the area of customer risk evaluation.
This risk can be transferred to the credit insurance market and our customers seek first and foremost to build a partnership with a credit insurer with the local country experience and ability to write credit limits for debtors in those countries.
Credit risk analysis is based on the overall business and political environment, transparency of company accounts and creditor protection in the event of default. But insurers also take into consideration the business relationship and past payment experience between the insured and its buyer.
Analysis of the political risk may be linked to factors such as the date set for the country’s next general election, the rising costs of basic necessities, fluctuations in the cost of raw materials and the buyer’s location within the country. The risk will also vary depending on the presence of differing communities, faiths or ethnic groups within the same country. For example, in the region of Azawad in Mali, credit insurance analysts suspended all cover but continued to insure business transactions in the Bamako area.
It takes time to build a trusting relationship with buyers.
Our qualified professionals can work with you to reduce your risks by securing your sales in Africa.
All that remains to be found is the most appropriate policy solution, optimize your limits so as to be able to work on an “open account” basis with your customers and promote the development of your business in Africa in full confidence.