Business credit insurance in Portugal: protection against non-compliance
Business credit insurance is a management tool that may encompass financial, commercial and legal areas. Its purpose is to ensure that a business is not affected by customers defaulting, due to market instability, for example, when such insurance could be an asset since it guarantees coverage of risks of non-payment of monthly instalments and ensures that there are no adverse effects.
In Portugal, in accordance with current legislation, there are a number of different kinds of mandatory insurance, although credit insurance is optional.
Aspects to be considered before taking out credit insurance
Credit protection insurance may be regarded as a viable solution, in that insurance will already be in place in the event of default. It will also ensure access to a specialised range of business debt collection and recovery services by accredited bodies.
Additionally, in some cases the credit insurance premium is a one-off payment that can be funded and paid for at the beginning of the contract, thus adding an asset to the debt. In short, the trader may have to pay interest on the insurance itself.
Portuguese public bodies providing credit insurance solutions for businesses
For the business sphere, COSEC - Companhia de Seguros de Crédito, SA is authorised by the Portuguese State to manage credit insurance for small, medium, large and multinational companies.
COSEC (Credit and Financial Guarantee insurer)
COSEC provides solutions supporting credit management and control in the internal and external market. It also covers and manages credit, guarantee and investment risks, mainly for higher-risk countries.
COSEC offers tools to avoid foreseeable losses, and in addition to technical assistance it provides a range of credit insurance in the form of a standard provision (State-backed credit insurance), and an External Market Capitalisation Programme (geared towards internationalisation).
Each type of insurance has its own specific features:
- Standard provision (recipients and beneficiaries, functioning of credit insurance, coverage, eligible markets and scale of operations)
- Capitalisation programme (recipients and beneficiaries, eligible operations, coverage, operative markets, advantage of insurance, goods to be exported and conditions of insurance).
Agency for Competitiveness and Innovation (IAPMEI)
In addition to COSEC, integrated financing and credit insurance solutions can be consulted on the financing portal of IAPMEI. This public agency, which is overseen by the Ministry of Economic Affairs, is responsible for promoting corporate competitiveness and growth and focuses on managing public support and funding for innovation and entrepreneurship.
Besides its responsibility for technical support, it also provides a range of credit insurance options. The IAPMEI portal can be used for simulations by filling in fields with the data identified, allowing the requirements and any useful information on each insurance product to be consulted, i.e., the objective, beneficiaries, eligible and ineligible operations, conditions of eligibility of the beneficiary, insurance cover, risks covered and bodies to be contacted).
Alternatives to credit insurance in Portugal
In light of the financial and economic instability in the business ecosystem, executive management must be alert if it wishes to reduce the risks stemming from lending. A variety of solutions can be found in addition to credit insurance. The most widely-used methods include self-insurance, factoring and letters of credit.
Self-insurance method
The self-insurance method takes the form of a reserve for particular situations, covering the deficit if some clients do not manage to meet their obligations. This, however, effects other cost areas: investments in credit management resources, information and acquisition systems, analysis and monitoring; impact on sales, given the risk tolerance; significant impact on capital allocation, for example, and is normally not included for large and unexpected catastrophic losses.
Factoring method
A factoring company normally holds credits granted by companies for a share in that factoring. These costs may vary between 1% and 10%, according to the various components. This allows direct access to the capital, in exchange for a percentage of the credit commitments, plus a charge. Many factoring companies also offer services associated to factoring and recoveries, among other activities, leading to third-party involvement in the company’s debt portfolio.
Some factoring companies take on the risk of non-payment born by companies, while others do not. The costs involved are: a considerable fall in the margin, loss of control of relationships with clients and restrictions in capacity associated to the availability of a bank credit line.
Letters of credit method
A letter of credit is an agreement by the bank to guarantee that a purchaser’s payment will be made on time and for the correct amount. In this situation the purchaser must apply to the bank for a letter of credit, which has the disadvantage of reducing its lending capacity. If reference is being made to developing markets, it may be necessary to guarantee cash.
The cost impacts include:
- only a single transaction for a single purchaser
- costly, including in terms of use of the credit line and the required collateral security
- absorption of capital, restricting new potential opportunities
- a possibly long drawn-out, exhaustive and excessively bureaucratic recovery process.