The difference between credit insurance and letters of credit.
Letters of credit can be a useful tool when trading internationally but are much more limited in scope than trade credit insurance.
A letter of credit is a guarantee from a bank that an agreed payment to a seller will be received on-time and in-full. While this may appear comprehensive, it only provides protection for international trade and applies to a single specified customer.
Protection at a cost
In the event of non-payment, the bank issuing the letter of credit steps in to the breach. In return for this service, they typically demand both security and a fee. Even when your customer provides these, you are likely to share the cost indirectly.
Limitations of letters of credit
While a letter of credit provides excellent bad debt protection, it is limited to one customer and will only cover international trade. This means that for every new customer, you will need to obtain a new letter of credit which is both time-consuming and costly.
The benefits of credit insurance
Coface trade credit insurance provides all the protection of a letter of credit and so much more. This includes:
- Coverage for domestic trade
- Indemnified debt collection service
- Access to updated financials on 80 million companies worldwide
- Access to economic updates, including sector, country, and political risk assessments
- Access to Coface underwriting expertise and other risk specialists