Cash flow frequently presents a significant challenge for importers. When purchasing goods from overseas, working capital is often entangled in ongoing orders, a situation exacerbated by extended shipping durations.
This predicament can severely curtail an importer’s capacity to accept fresh orders, consequently hindering their potential for expansion. Fortunately, businesses engaging with Chinese suppliers can surmount this hurdle through the utilization of Sinosure trade credit insurance.
What is Sinosure?
According to Europeanbusinessreview.com, the China Export & Credit Insurance Corporation, also known as Sinosure, is a state-owned export credit agency. Like many other such agencies around the world, its purpose is to minimize risk to Chinese exporters by providing insurance against non-payment by customers outside China.
If a supplier doesn’t have enough working capital to grant deferred payment to a buyer, with a Sinosure policy, they can go to a lender that deals with trade credit and get financing for the deal.
Sinosure’s products insure Chinese firms selling abroad against credit, commercial, and political risks. They can insure companies against such risks as insolvency and bankruptcy of the buyer, fraud in the supply chain, and also against broader background risks such as war, sanctions, restrictions on money transfers, and expropriation and nationalization.
Because of the many risks involved in trading internationally, Chinese exporters will generally want payment for a purchase order ahead of time. They typically request a 30% down payment before production begins, with the remaining 70% paid after production is completed, but before the order is shipped.
They do this because often suppliers may not be able to assess the creditworthiness of their buyers. They may not have the experience or the resources to investigate a buyer in another country.
Demanding payment in full before shipping begins protects exporters against the significant risk of non-payment.
But this can be a problem for many importers, who may have their working capital tied up in existing orders. Importers may have to forego buying goods that they know they can sell, simply because they don’t have the cash flow to prepay for a new order today.
This limits the importer’s ability to meet market demand and grow their business; it limits the exporter’s potential sales; and in general, it slows trade and economic growth.
Sinosure exists to solve this problem. It provides exporters with insurance against a buyer’s non-payment – what’s known as trade credit insurance. If suppliers have their trade credit insured, they will be more willing to grant deferred payment. This allows those suppliers to increase their trade turnover with foreign business partners – and does the same for importers.
Sinosure has been in operation since 2001 when it was formed out of the merger of the export credit insurance departments at the People’s Insurance Company of China and the China Export and Import Bank.
Sinosure offers credit insurance to exporters who work with small and medium-sized enterprises (SMEs), as well as large corporations. In 2020, Sinosure insured more than $700 billion in export credit for 240,000 Chinese exporters.
Sinosure has an “A+” (strong) credit rating from Fitch Ratings and S&P Global Ratings.
How importers can use Sinosure to get trade credit
Sinosure insures Chinese exporters, not importers abroad, but a buyer outside China will still have to be approved by Sinosure so that their supplier in China can have their trade contract insured.
For this to happen, the importer has to pass through Sinosure’s credit investigation process, which typically takes 21 days. Once the investigation is complete, Sinosure will assign a credit limit to the importer.
Once the importer has a credit limit, the Chinese supplier can then apply some or all of this credit limit to their contract with the importer, allowing the supplier to offer deferred payment terms for the order.
However, there’s an important detail to be aware of: Sinosure doesn’t deal directly with buyers outside China. This means that importers who need a Sinosure credit rating will have to hire a company that specializes in obtaining Sinosure credit limits for importers, for instance, Axton Global, the market leader in this field.
The Sinosure process
The process of obtaining trade credit with Sinosure begins with the importer going through the insurer’s credit investigation, which, as mentioned before, typically takes 21 days. Once the investigation is complete, Sinosure assigns a credit limit to the importer.
Then the supplier in China opens an insurance policy with Sinosure, assuming they don’t already have one. The supplier registers their contract with the buyer with Sinosure and gets insurance coverage for the invoice.
Even with a Sinosure trade credit limit, importers can still expect to be required to make a down payment, typically 10% to 30% of the total purchase price. Once the supplier receives the deposit, they produce the goods and ship them without further payment.
The importer receives the order and has until the end of the deferral period to pay for it. This period typically lasts 90 days, but the length of time can vary depending on several factors, including the length of the relationship between the import and the supplier.
Finally, the importer pays off the remaining balance owed to the supplier at the end of the deferral period.
What is meant by a ‘Sinosure credit limit’?
The credit limit is the maximum amount of insurance that Sinosure is willing to offer an exporter for contracts with a particular importer.
If you, as an importer, have a Sinosure credit limit of $1 million, this means you can get $1 million in trade credit from your Chinese suppliers, secured by Sinosure.
An importer’s credit limit can be divided up between different orders and suppliers.
So if you have a credit limit of $1 million, one of your suppliers can use, for example, $300,000 of that limit for their insurance policy on a particular order. This leaves you with $700,000 in available credit. Another supplier can use $500,000 to insure a different order, leaving you with $200,000 available, and so on, until the $1 million limit is reached.
Your credit limit as an importer is determined by several factors. First of all, your company’s financial indicators – your revenue, profitability, assets, and so on.
Secondly, your credit history – your record of payments to past suppliers, whether or not your company has defaulted on any debts, and so on.
Finally, Sinosure will also take into account whether or not you have a history of trade transactions with companies inside China.
How to secure a Sinosure credit limit
To obtain a Sinosure credit limit, you will need the services of a consultancy that specializes in credit limit applications for importers, such as Axton Global.
This company will be the go-between linking your import business with Sinosure. It will take you through the process of applying for a credit limit, which will begin with you providing your company’s financial documentation for the Sinosure credit investigation, and end with Sinosure assigning you a credit limit.
However, in the case of Axton Global, the services available to you will not end there.
Axton Global can help you increase your Sinosure credit limit, negotiate deferred payment terms with Chinese suppliers using Sinosure to arrange the necessary paperwork and transfer your credit limit from one Chinese supplier to another.
In which countries are importers qualified for a Sinosure trade credit limit?
Sinosure’s decisions on trade credit are made on a case-by-case basis, and importers in virtually all countries of the world can apply.
There are only a handful of countries where Sinosure isn’t able to provide trade credit to importers – those that don’t have diplomatic relations with China, or those that are currently at war or are restricted by Chinese treaties.
Currently, these countries are Bhutan, Dominica, El Salvador, the Grenadines, Guatemala, Haiti, Honduras, Palau, Panama, Paraguay, Saint Vincent, the Solomon Islands, Swaziland, and Tuvalu.