Africa: Become Competitive by Insuring Payment Risks

By Sherrod Seward

 

African consumers crave U.S. products and services but also want competitive payment terms. Since American businesses tend to use strict credit management practices, they miss out on great opportunities in Africa to foreign competitors. Cash in advance and letters of credit transactions are very secure but restrictive for business growth, especially for potential customers in emerging markets where working capital can be scarce.

 

Trade Credit Insurance (“TCI”) is an entire industry devoted to monitoring, underwriting, insuring, and collecting on business receivables around the world. In a nutshell, TCI protects business from non-payment of receivables due to commercial and political risks. TCI covers commercial risks such as protracted defaults, insolvency, and on occasion non-acceptance of goods and/or services. TCI also covers political risks such as non-payment due to political-related violence, government expropriation, and inconvertibility of funds.

 

The majority of businesses in the developed world use trade credit insurance in foreign markets to stay competitive in the global economy. Meanwhile, U.S. companies generally rely on robust credit teams with strict guidelines to keep them safe from risky investments and transactions. Large European insurers such as Euler Hermes, Coface, and Atradius have hundreds of underwriters stationed all over the world to provide a perspective on potential customers that cannot be easily replicated by anyone else.

 

The Chinese are adept at securing African infrastructure projects by offering payment terms (among other advantages) far superior to U.S. competitors. The Chinese businesses often have the backing of their government’s trade credit agency, Sinosure, which does aggressive underwriting. While it is true that the Chinese are often competitive on price, African consumers actually prefer American and European quality. However, ideal payment terms often seal the deal for the Chinese.

 

Covering African risk is possible but challenging compared to other places in the world because of low access to information. While the large European insurers express interest in providing increasing coverage in Africa, there is a limited presence of underwriters operating in the continent. Thus, underwriting decisions are made using audited financial statements and trade references. Unfortunately, many African businesses are not able to provide this information because financial statements are not prepared and audited or trade credit history is not readily available in the market. African small and medium sized businesses must start becoming part of the global economy by being more actively transparent. Active transparency includes getting financials audited by reputable accounting firms and asking for suppliers to provide trade references to global credit agencies.

 

TCI coverage availability in Africa will grow with demand and increased business activity on open terms transactions. The demand will encourage underwriters to move into these countries and learn about the local businesses. In Western and Southern Africa, many private insurers are already writing TCI policies with confidence. In addition, the Export-Import Bank of the United States has a mandate to support exports to Africa and will stretch further on African risks when the exporter is a SBA qualified small business.

 

If you have any questions about trade credit insurance, please feel free to contact Sherrod at sseward@irc-group.com.

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