Tariffs: You Ready?

What is Trade Credit Insurance?

Trade credit insurance is a financial product that protects businesses from the risk of non-payment by their customers, particularly when selling goods and services on credit. This type of insurance is vital for companies operating in international markets, where buyers may face various financial risks, such as insolvency, political instability, or payment defaults. Trade credit insurance helps businesses manage these risks by providing compensation for unpaid invoices, ensuring that cash flow remains stable even when customers are unable to pay. Insurance for domestic customers are equally crucial because they too can be confronted by unexpected pressures on sales and cash flows that result from the imposition of tariffs. Non-payment of those receivables result in the same consequences faced by exporters for unpaid foreign receivables.

How Tariffs Impact Businesses

Tariffs, taxes imposed by governments on imported and exported goods, can have several far-reaching consequences for businesses:

• Increased Costs: Tariffs can increase the cost of imported goods and raw materials, which affects the pricing structure of products sold both domestically and internationally. Companies may face higher production costs, leading to reduced margins or the need to increase prices, which can impact customer demand.
• Supply Chain Disruptions: If tariffs target specific countries or industries, businesses relying on suppliers from those regions may experience disruptions or delays. This can lead to delays in production and delivery, damaging relationships with customers and affecting overall business operations.
• Price Volatility: Tariffs can lead to fluctuations in market prices, which may make it difficult for businesses to predict and plan for future costs. Volatile pricing can lead to increased uncertainty, making financial forecasting more challenging.
• Reduced Market Access: High tariffs may make it less profitable to sell in certain markets or render products unaffordable for customers in those regions. This can result in a loss of sales and reduced global market share.

How Trade Credit Insurance Helps Protect Against Tariffs

While tariffs themselves cannot be avoided, trade credit insurance can help businesses protect their bottom line by addressing some of the financial consequences associated with them. Here’s how:

1. Mitigating Increased Risk of Non-Payment

In situations where tariffs increase the costs of goods, customers may face financial strain or find it difficult to meet their payment obligations. In these cases, trade credit insurance can provide a safety net, covering the unpaid invoices if customers are unable to pay. By reducing the risk of non-payment, businesses are better able to manage cash flow, even when external factors like tariffs affect their operations.

2. Protecting Profit Margins in Unpredictable Markets

When tariffs increase the cost of doing business, many companies face the dilemma of whether to absorb the extra costs or pass them onto their customers. If customers are unwilling or unable to absorb these higher costs, businesses risk facing delayed or defaulted payments. Trade credit insurance can offer reassurance by protecting against the risk of customers defaulting due to their inability to pay, helping businesses preserve their profit margins during times of price volatility.

3. Maintaining Supply Chain Stability

Tariffs can disrupt supply chains, causing delays and price hikes in raw materials or finished goods. If these disruptions cause cash flow problems for customers, trade credit insurance can help. By insuring against the risk of default, companies are protected from the financial consequences of supply chain interruptions that are beyond their control.

4. Safeguarding International Sales and Market Access

For businesses that rely on international customers, trade credit insurance helps ensure that they can continue to operate in foreign markets, even if tariffs reduce the demand for their products. The insurance helps cover the financial risk associated with selling to customers in countries where tariffs are in place, ensuring that if a customer defaults, the company can recover a percentage of the loss.

5. Enhanced Financing Options

Lenders are often more willing to extend credit to businesses that have trade credit insurance in place. By providing coverage against non-payment, businesses become less risky in the eyes of financial institutions. This can help companies secure favorable financing terms, even in times of economic uncertainty or when tariffs affect their operations. With access to better financing options, businesses can maintain their operations and growth potential despite rising costs from tariffs.

Conclusion

While tariffs present significant challenges for businesses engaged in international trade, they are a reality that companies must navigate. Fortunately, trade credit insurance offers an effective tool to mitigate the financial risks associated with tariffs. By protecting businesses from non-payment, stabilizing cash flow, and enabling better access to financing, this type of insurance can act as a vital buffer against the unpredictable nature of international trade.

Incorporating trade credit insurance into a business’s risk management strategy not only shields against the immediate financial impact of tariffs but also ensures long-term stability and growth, even in the face of economic uncertainty. By adopting a strategy that protects against the unpredictable, businesses can continue to thrive regardless of the changing tariff landscape.

Next Step

Speak with a RIAC member to understand how trade credit insurances | receivables insurance can benefit your business.