Safety Net

Not long after partners Stephen Schultz and Timothy Burgess purchased export credit insurance to protect their electronics distribution business, they had to collect on it-to the tune of more than $250,000. A bankrupt subsidiary of a German company with whom the partners had been doing business was unable to pay their Leominster, Massachusetts, company, Kerotec Inc. But thanks to the new insurance policy, the partners got paid anyway.

In the past, if you wanted to sell to foreign customers, you had limited payment options: open credit terms (risky for the seller unless a long-standing business relationship existed), cash in advance (this is rare), or a letter of credit. Now, with export credit insurance, there's another option to protect the seller. According to Joe Grimes of American Credit Indemnity (ACI), a Baltimore-based subsidiary of Dun & Bradstreet, export credit insurance protects companies against nonpayment, slow payment and insolvency.

This can come in handy if you're trying your hand at exporting for the first time when you may be more vulnerable to payment problems. Grimes says ACI's export credit insurance is especially helpful to small companies because it frees them from the responsibility of collecting credit information on overseas buyers, as well as from much of the responsibility of managing receivables.

Kerotec, which has clients in South America and Europe, uses export credit insurance even after establishing a solid working relationship with customers because insurance allows the company to obtain financing on its international receivables. "Basically, by having this insurance, we know what our maximum [loss] would be [before the insurance takes effect]," says Schultz, who believes small businesses that don't purchase export credit insurance are asking for trouble: "For a small company to lose half a million dollars would hurt."

This article was originally published in the July 1996 print edition of Entrepreneur with the headline: Safety Net.