Risk and Insurance

TFG Risk and Insurance Guide

Trade Finance Global / Risk and Insurance

Risk and Insurance

Transactions across international borders are fraught with risk and complexity. Faced with this, many firms and investors can baulk at engaging in such transactions, even when they know them to be profitable, valuable enterprises. Through its array of insurance and guarantee products, Trade Finance Global can secure international commercial contracts and mitigate risks to investment.

Popular Risk & Insurance Products

Guaranteesbinding financial agreements between contracting parties and a third party which guarantee that contractual obligations will be met, and that financial penalties will be incurred if not.

Bonds – Flexible financial products underpinned by guarantees which ensure financial reparations to the bond holder if contractual obligations are not met.

Credit IssuanceA core financial product underpinning the import and export of goods across international borders whilst mitigating financial risk to both buyer and seller.

SuretiesA guarantee to protect investors against direct loss of investment in the event of a complete failure to fulfil contractual obligations (such as insolvency).

Claim Management – The process by which any claim against an insurance or guarantee product is handled by a bank or third party agent.

Get in touch with our risk and insurance experts. Enquire now.

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An A to Z of Risk And Insurance

Risk and Insurance – Useful Guides

South Africa’s Political Crisis

Reforming governments in a number of African nations including South Africa, Angola and Zimbabwe are driving a reduction in political risk both within these countries and across the region. Coupled with a recent lift in commodity prices, a number of African states are consequently experiencing solid economic growth. Moreover, the traditionally robust economies of the West African region (such as Nigeria, Ghana and Cote d’Ivoire) are all projected to enjoy stable upward economic trajectories as a result of their prudent debt management policies. That said, the region remains fraught with risk and structural economic issues which can leave investors apprehensive about the trading opportunities these trends offer.

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Export Credit Agencies (ECAs) | ECA Finance

Export Credit Agencies are specialist financial institutions established to support domestic businesses as they establish or grow their export businesses. These usually take the form of either government-backed export credit agencies, which support national businesses to develop trade links abroad, or internationally-backed development banks, which facilitate trade with developing world regions. ECAs largely focus their product offering on firms interested in establishing long term economic partnerships with businesses in emerging markets and the developing world. Their strategic goals usually extend beyond increasing export flows or providing trade finance towards provoking growth in historically poor or developing countries and to develop diplomatically strategic economic relationships.

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Bond Insurance Policy

Bond Insurance policies work as a form of financial guarantee insurance. An insurance company guarantees the scheduled payments which a bond or other security promises to the holder of that bond in the event of the issuer of the bond failing to make those payments. As such, the insurance “guarantees” the bond to the holder, increasing the bond’s security and credibility.

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Credit Insurance

Companies engaged in international trade of goods often use trade credit insurance to protect the receivables involved in their transactions from credit risks such as non-payment of goods, invoices and other debts. When working across international jurisdictions with new suppliers, these risks can be exacerbated. As such, trade credit insurance helps protect and mitigate risk for exporters of credit loss and non-payment.

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Guarantees and indemnities are used by borrowers to mitigate their own risk of debt default, and thereby reassure potential lenders or investors of their viability for lending. Both take the form of a contractual promise whereby a lender or insurer will assume responsibility for a firm’s failure to meet its contractual obligations. For a guarantee, the guarantor making the guarantee accepts responsibility for the failure of the contract by guaranteeing payments in a contract will be made to the affected party. In contrasts, indemnities require an insurer to accept liability for loss or damages caused by agreeing to pay related costs

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Frequently Asked Questions

What is trade credit insurance?

Companies engaged in international trade of goods often use trade credit insurance to protect the receivables involved in their transactions from credit risks such as non-payment of goods, invoices and other debts. When working across international jurisdictions with new suppliers, these risks can be exacerbated. As such, trade credit insurance helps protect and mitigate risk for exporters of credit loss and non-payment.

What is political risk insurance?

Political risk insurance is a specialist type of insurance which provides financial protection to investors and businesses in the event of losses incurred as a result of action by a government against them, or by events deemed “political” in nature. Simple political risk insurance protects against direct government activity which proves harmful, such as intervention against a business to expropriate or nationalise assets owned by that business in their territory, or refusal to convert or repatriate local currency. More complex political risk products can insure companies against losses incurred by more general political events, such as political violence, civil wars, or sovereign debt defaults.

How does insurance facilitate trade and trade finance?

International trade across national borders creates numerous risks and complexities for exporters and importers. In particular, operating across geographic distances between two separate legal, trade and political jurisdictions can make investors, lenders and traders nervous about the risks posed to their investments. In a domestic transaction, if one contracting party fails to fulfil their obligations – they take payment without producing goods, they deliver late or faulty goods, or declare insolvency – the other contracting party can pursue matters through the domestic court system. However, in international transactions, this can be much more complex. Moreover, the value of international trade transactions tends to be much greater than domestic trades.

Insurance and guarantees can mitigate against these risks by using a trade finance partner (such as a bank) as a broker and agent between the contracting parties to ensure these risks do not become issues, and to resolve issues when they arise. In doing so, these products provide the buyer certainty that when issues occur, their investments, money and business are safe. Moreover, in their role as facilitators, trade financiers can help facilitate trade finance by managing payments and documents between parties to ensure secure, trust-based transactions are conducted.

How does credit issuance work?

Credit issuance is the process by which importers guarantee to exporters that they will pay them in full once the conditions of the contractual agreement between them are fulfilled.

Commonly, the actual issuance of credit is made to and from third party banks or trade financiers assisting the two transacting parties, using a financial instrument known as a letter of credit.

For example, UK toy trader Party A wishes to buy $1m of toy cars from Chinese toy car maker Party B. Party A does not want to pay $1m until it is proven that the toy cars have been made to the correct standards and shipped to the UK. Party B does not want to make the toy cars without assurance of payment from Party B.

Using two third party banks, a credit issuance can be made to Party B guaranteeing that Party A will pay Party B once the toys are made and shipped. Once Party B ships the toys and provides the appropriate documentation (such as a Bill of Lading), Party A makes their payment to their trade financier, who passes the money through Party B’s trade financier to Party B.

For more information, visit our Credit Issuance page.

How does a surety bond work?

A surety bond is a specific type of guarantee used by contracting parties to provide surety in the event of one party entering insolvency. If two parties agree a contract underpinned by a bank providing a surety, then that bank guarantees to pay one party if the other party fails to fulfil their contractual terms, usually due to them ceasing trading.

For example, UK toy trader Party A wishes to buy $1m of toy cars from Chinese toy car maker Party B. Party B asks for the payment up front, which Party A is apprehensive about as they are not based in China and do not know the supplier or the Chinese legal system well. As such, Party A purchases a surety on their contract; if Party B is to become insolvent whilst the toys are being produced, the bank providing the surety will pay Party A their $1m. The bank will then pursue Party B for the $1m reparations payment.

For more information, visit our Surety page.

What is a guarantee?

A financial guarantee is a non-cancellable ‘promise’ backed by a bank, insurer or other third party. The guarantee underwrites a contract by guaranteeing to make payments to one party in it if the terms of the contract are not met by the other party.

Guarantees can take many forms depending on the nature of the contract. They can support contractors bidding for work; buyers required to make advance payments; importers needing performance guarantees; and even maintenance or warranty periods on purchased goods (such as machinery). However, all guarantees work as separate agreements to a contract, and are strictly focused on the compliance or non-compliance with the terms of that contract.

For more information, visit our Guarantee page.

We’re 100% independent: working only for our businesses

Unlike some of our competitors, we are not tied to any lenders, we arrange a wealth of shipping brokers and freight forwarders for you in order to choose the most appropriate options for you

Get in touch with our finance experts. Enquire now.

First Name*

Last Name*

Your Organisation*

How much trade finance are you seeking?*

Your Email*

Telephone Number*

Briefly, what type of stock or trade are you looking to finance?

(Marketing Terms can be found here)

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