Image of Service Exports – A Growing Market With Unique Credit Challenges

Service Exports – A Growing Market With Unique Credit Challenges

Global trade in services totals around $5 trillion a year, less than one-third the volume of tangible goods being bought and sold around the world. But trade in services is growing much faster than goods trade, in sectors like accounting, advertising, architecture, construction, education, engineering, entertainment, environment, health, IT, legal services, telecommunications, tourism, and transportation.

Exports of services from the USA total less than $1 trillion a year, but demand for U.S. services is expanding, not only in developed countries but also in emerging markets. In contrast with its overall trade deficit, the USA maintains a growing trade surplus in services.

Leading U.S. services exports include intellectual property, royalties, license fees, professional and technical services, finance and insurance, other business services, and government contracts. The USA is the largest exporter of services in the world, followed by the U.K., Germany, France, China, Japan, India, Ireland, Singapore, and the Netherlands.

Yet a very small percentage of all U.S. service providers are exporters. Many service companies lack a clear export business development strategy. Others find it can be more difficult to communicate a service offer to foreign customers than an actual product. Tailoring services for overseas buyers requires an understanding of other cultures and markets that may be beyond the skill sets of newer exporters.

Another challenge for service exporters is lack of access to financing and credit. Services are intangible. There’s no physical inventory to pledge as collateral. There are no bills of lading to document shipment dates. And when service exporters extend credit abroad, banks and other lenders may regard their receivables differently from A/R engendered by goods exports.

If an exported service has already been performed, and completion has been formally accepted by the overseas customer prior to invoicing, in principle the resulting accounts receivable should provide no less of a borrowing base than when a manufactured product is exported, although service exporters may still struggle to convince their funding sources that this is the case.

Financing services receivables becomes even more daunting when an exporter invoices overseas customers before their services have been completed . . . or in some cases before they have even begun. For example, subscription services and other annual service contracts billed at the start of the year. Or royalty agreements billed upfront but where the amounts of future royalties are yet to be calculated. Or extended warranties invoiced in full at the beginning of the warranty period.

In other cases the service itself may have been provided and invoiced by the exporter but the buyer’s acceptance may not follow for some time. This can be the scenario for engineering services that precede construction projects, where the customer’s satisfaction with the services won’t be ascertained until the construction has been completed or at least is well under way.

Even transactions secured with letters of credit can face questions from financial institutions when the export involves services rather than tangible products.

Exporters can surmount these challenges by demonstrating to a lender their experience with providing their services, their history with their overseas customers, etc. Beyond what exporters can do on their own, the most powerful tool for facilitating financing of service-based foreign receivables is export credit insurance.

Credit insurance protects exporters’ invoices against nonpayment for virtually any reason. Accounts receivable generated by exports of services are no exception.

Export credit insurance does more than mitigate nonpayment risks. It’s a sales tool that can help exporters win more international orders and it’s a financing tool that makes foreign receivables more attractive to banks and other lenders.

For the various kinds of scenarios that can arise with exports of services, credit insurance policies can be customized to match their coverage with the parameters of the underlying trade transactions. As long as the business case is cogent, most insurance companies are prepared to negotiate policy wording with an exporter. On a surplus lines basis, bespoke policy wordings can be drafted from the ground up.

Meridian Finance Group specializes in brokering export credit insurance. With offices nationwide, and affiliates in London and Singapore, we work with every underwriter in the market: insurance companies, Lloyd’s of London, government export credit agencies (like EXIM Bank), and multilateral financial institutions.

We encourage exporters to contact us as early as possible in the development of their transactions or their international sales strategies. Without seeking to make the tail wag the dog (i.e., asking exporters to modify their contracts in order to facilitate insurance), with over 25 years of experience we may be able to suggest some fine-tuning that could make insurance underwriting—and even trade finance overall—more feasible to arrange.

Credit insurance policies can be written for lenders who finance international sales or projects directly, or for exporters with their lender added as the policy’s assignee or loss payee . . . in the latter case  providing protection for both the exporter and the lender.

Other kinds of insurance are available for service exporters. Equipment transported to another country to perform a service can be insured against expropriation. A contract frustration policy can cover service contracts with foreign governments. Warranties backed by a standby letter of credit can be protected against wrongful calling of that performance bond.

For more information visit www.meridianfinance.com, email insurance@meridianfinance.com, or call +1.310.260.2130.

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