With the uncertainty created by the novel coronavirus pandemic, the need for trade credit insurance is rising and that’s why the Export-Import Bank of Jamaica (EXIM Bank) is urging more producers to consider adding the policy as another layer of protection for their businesses.

For some businesses receivables or outstanding payments can add up to hundreds of thousands of dollars. In some cases that’s enough to run the business into bankruptcy if the payment is not made on time. Normally, the producer enters into an agreement with a buyer, outlining when the payment will be made. But what happens in the event that the buyer does not pay?

Managing director of Jamaica’s Export-Import Bank, Lisa Bell, said that’s where trade credit insurance comes in.

“One of the major issues that small businesses are facing, particularly in COVID, is that they are held ransom to the buyers because the buyers take a long time to pay. But what this product does is protect the seller in the event of non-payment by the buyer.”

Currently, mostly large and medium-sized entities take out the policy, but she noted that it’s even more important for small producers who struggle with cash flow issues.

“The beauty about the product is that it can be partnered with a loan so that we could extend a loan to the seller using the insurance policy as collateral. What that has the power of doing is freeing up the cash flow,” Bell continued.

The EXIM Bank offers two types of coverage — commercial risk coverage and political risk coverage. The coverage against political risk is optional. For commercial risk, the bank provides coverage for 85 per cent of any loss.

“We speak about loss in instances of non-payment in the likelihood of buyer insolvency or protracted delinquency. We do not cover losses which relate to trade dispute,” said Audrey Morris, risk and compliance manager at the EXIM Bank.

She explained that, “The premium income is 60 cents per $100 of shipment. So, if you ship $1,000 worth of goods you will declare it to the EXIM Bank and your premium income will be 1,000 divided by 100 multiplied by 60 cents. If you’re exporting to a region where there’s political coverage then you may want to take up the political risk coverage option which comes at an additional 3 cents per 100.”

Morris said the bank has a prescribed list of countries which it covers. However, “If there is a region to which you would like to export and it’s not on the cover then we will have to do our own due diligence and advise whether we will accept that risk.”

The premium is paid monthly and is a function of the declaration which a seller makes to the EXIM Bank. Therefore, if there are no shipments for a particular month the seller would submit a nil declaration.

In 2019, the EXIM Bank conducted an assessment of market conditions, which showed that there is a great need for trade credit insurance, both on the domestic and international markets. An International consultant was also hired to help the bank refine its business model based on the macroeconomic improvements. One of the key lynchpins in that new business model is the expansion of credit insurance.

Bell noted that, in addition to providing credit insurance coverage, the product also helps exporters to learn more about their buyers. “You can be shipping to a company in the United States and you have no clue about the company, so what EXIM does is, we have a relationship with what is called a global insurance provider who assesses the buyer and says if you want to ship to this company we have checked them out and we think, based on their references, bank, and history, it would be safe if you’re selling goods for no more than $1 million. So when we get that information we take it to the local seller and decide the kind of coverage we will provide.”

Despite the relevance of trade credit insurance, especially in a pandemic. Bell says the take-up has been low. That’s why she’s urging more local companies, both big and small, to consider the option.

“Even the companies that you think are strong, the larger manufacturers and exporters in Jamaica, they understand that companies can go bankrupt in a day and if it was necessary before, it is even more necessary now because of the uncertainty in the global environment,” said Bell.

She explained that the EXIM Bank has been in existence for over 35 years and trade credit insurance has always been a product because it is the signature product of every EXIM Bank across the world. Notably, she claims that the EXIM Bank is the only entity in the country which offers trade credit insurance to protect exporters.

The product can be used to protect against local buyers and well as international buyers.