The global tech industry is one of the main growth engines worldwide. The tech sector is responsible for over 16% of GDP in Israel and is also a significant exporter – the volume of high-tech exports in 2022 reached $67 billion, accounting for about 54% of Israel’s total exports.
As high-tech companies grow and enter new markets and segments, both domestically and internationally, they often need to handle larger credit volumes, increasing their level of risk and exposure. One of the most effective ways to mitigate such risks is through trade credit insurance.
What is trade credit insurance, and why is it important for the technology sector?
Credit insurance protects tech companies from a wide range of scenarios. Here are a few examples:
Mitigating international trade expansion risks
A young technology company in the telecommunications sector expanded its operations to additional international markets and started offering its services with flexible payment terms, in order to attract new customers. However, this also exposed the company to the risks of potential bad debts. The credit insurance obtained by the company provided financial protection against potential losses and ensured the financial stability required for its international expansion. Without credit insurance, many transactions would have been possible only with upfront payment or might have been abandoned altogether. Additionally, the communication with the credit insurance company and the data it provided about the financial reliability and repayment capacity of customers helped the company make informed decisions regarding customer selection based on their risk appetite, providing the company with a secure head start for its expansion, knowing that its credit risks were covered.
Mitigating risks from expanding distribution or specific customers
A cybersecurity software company faced a different dilemma. Its largest distributor significantly expanded its activities, and although it was a good, large, and stable customer, the amount of credit granted to them exceeded the limits the company was willing to provide to a single customer. A failure on the distributor’s part could have threatened the company’s stability. Specific credit insurance that limited the risk in dealings with this particular distributor allowed the company to increase its sales securely.
Mitigating risks in a capital-intensive project
A well-established telecommunications company secured a contract for a large-scale project that required significant investments in resources, equipment, production capacity, and human resources. While the project promised substantial potential revenues, it also posed financial risks due to its size and the inherent risk of project cancellation by the client after the company had already incurred significant expenses to initiate it. The company recognized the need to protect its financial position and address the significant credit risks associated with the project during and after its completion. Therefore, it acquired credit insurance tailored to the project’s commercial terms, including pre-shipment coverage, which ensured protection for its investment.
Benefits of credit insurance for technology companies:
Improved financial stability and protection of cash flow
Credit insurance acts as a financial/risk mitigation tool that provides protection to companies against customer non-payment or payment defaults. It ensures the safeguarding of cash flows, maintaining the potential for growth, even under challenging economic conditions, and financial resilience.
Risk reduction and mitigation through insurance coverage
By transferring the risk to the insurance company, credit insurance allows the company to focus on its core business activities. It enables investments in research and development, and sales, and provides the security and flexibility to capitalize on opportunities and implement growth strategies.
Assistance in attracting investors
Credit insurance can assist hi-tech companies in enhancing their attractiveness to investors by reducing uncertainty and perceived risk associated with investing in them. It conveys a message that the company has taken proactive measures to protect the investments of both existing and potential investors.
Strengthening business relationships
Credit insurance strengthens the ability of tech companies to fulfill their financial obligations to suppliers and business partners. This contributes to building a reliable and positive reputation within the industry.
Facilitating credit acquisition and financing
Credit insurance policies can improve the company’s credit rating in Know Your Customer (KYC) processes with financial institutions, enabling it to obtain credit under more favorable conditions.
How to choose the right insurance coverage for your company?
Since the circumstances and risk profile of each hi-tech company are unique, it is crucial to assess the specific needs and potential risks before selecting insurance coverage. This ensures the most suitable protection and support for the company’s business reality while maintaining a balanced risk management approach.
The choice of insurance coverage involves considering various factors, including the scope of operations, company size, trade volume/sales, customer diversification, and risk level.
For example, the credit insurance coverage for two SaaS companies may differ significantly due to factors such as user base, diversification/concentration, scaling, and risk dispersion.
In summary, technology companies selling to international customers face increased credit risks that can threaten their financial stability, hinder cash flows, and impede their ability to attract investors and grow. To mitigate these risks and support growth and expansion, it is recommended to implement risk management strategies, conduct credit evaluations, and obtain tailored credit insurance that aligns precisely with the company’s needs.
