Why Businesses Overlook Trade Credit Risk? Part 2

My last article described several reasons why businesses owners and financial managers overlook the risk of getting paid. In Part 2, I’ll describe two ways that credit insurance helps a business better manage their risk.

Increase operating efficiency

Many times, a business’s human resources are stretched so that besides basic credit functions, they simply don’t have time to proactively monitor the customer base.

With a credit insurance policy in place, Coface offers the client proactive monitoring through a worldwide team of underwriters and analysts. This provides the client with a huge information gathering capability such as:

  • claims filed against buyers/customers
  • industry sector payment trends
  • payment trends by country
  • financial statements on individual companies
  • database of over 80 million companies
  • millions of actively monitored companies

Credit insurance becomes the first-pass at establishing customer credit. By off-loading the work onto the credit insurance underwriters, a company can stretch its staff further, reduce operating cost and operate more efficiently while being more informed about the customers at the same time.

If Coface approves coverage on the customer, no other action is needed by the in-house credit staff. If coverage declined or partially approved, only then is further credit investigation by in-house staff necessary. This stretches resources and reduces the cost of credit information since credit reports are only needed on accounts refused for insurance coverage.

ROI of Credit Insurance 

By proactively protecting themselves  from credit risk, a business gains a return on investment in credit insurance. I’m sure other forms of insurance offer an ROI, but credit insurance specifically is a growth tool the helps in several key ways that can be quantified.

  1. Mitigation of customer nonpayment risk
  2. Extension of more favorable credit terms to customers
  3. Extension of credit to new customers
  4. Obtaining better financing terms from lenders
  5. Expansion into new markets
  6. Reduction of the needed amount of bad debt reserves
  7. The business also benefits from the insurer’s expertise and gains peace of mind – after all, what’s the value of an unpaid invoice?

In the future, I’ll write a more detailed article on the ROI of credit insurance.

Conclusion

Proactively managing credit risk through a credit insurance policy helps your company grow, access capital and stretch human resources to operate more efficiently. Contact me to quantify the benefits for your business!

Why Businesses Overlook Trade Credit Risk? Part 1

“We’ve collectively lost sight of what insurance actually is: a way to protect yourself against a possible future outcome. Some of the people who buy the insurance will eventually be affected by that outcome. Others never will be. But since none of us can know beforehand which camp we’re in, we’re willing to pay a little bit now for the peace of mind of knowing we’re covered, just in case.”      Stephanie Slade, Reason Magazine

Stephanie Slade’s quote perfectly describes the value of all kinds of insurance. For insurance to make sense, we must accept that we have risk. Otherwise, we’d be paying for something we don’t need. We readily acknowledge risk and buy many types of insurance:

  1. Homeowners insurance protecting against serious damage to our homes
  2. Flood insurance (just ask people in Houston!)
  3. Auto insurance to protect against the cost of repairing or replacing both our own and other people’s vehicles and property
  4. Life insurance to replace income in case of an untimely death

In the business world, there’s one potentially large, unknown risk that is often overlooked. In fact, many business owners and financial managers are oblivious to it. This risk  has the power to seriously damage a business; even to the point of ruin and is present whenever a customer owes a significant amount of money to their supplier and can’t or won’t be able to pay. It’s called trade credit risk and it’s the cause of 25% of all commercial bankruptcies. Continue reading

Back to Basics: What if my Largest Customer Doesn’t Pay?

Sales Concentrations and Large Customer Payment Risk

Take a second and think of the name of your largest customer. Now, think about how much that customer owes you. Do you have the figure in mind? Next, imagine that your next call or email tells you that this customer can’t or won’t be paying you. Let that sink in for a minute.  What thought runs through your mind? If you’re like most people, it’s probably “Oh Nooooooooo….” or something worse.

At a certain dollar amount, an unpaid customer balance changes from an irritation to a potentially devastating event as the cash flow gap stretches your business to the breaking point. Continue reading

5 Reasons a Customer May Not Pay

Over the last year, a lot of businesses aren’t getting paid by their customers! Credit insurance claims are up significantly. Commercial bankruptcy is up 26% from 2015 to 2016. Payment patterns are slowing in many countries. High levels of consumer debt are causing sales reductions in several key industries like the auto industry.

While every case of non-payment is unique to the situation, there are five common reasons customers may not pay what they owe. Continue reading

Protect Your Client’s Largest Asset

Are you helping your clients protect their largest asset? Are you looking for ways to add value to your client relationships? To be a trusted adviser who points out unforeseen risks in their business? Would it be helpful to differentiate yourself from competition?

If the answer to any of these questions is “yes”, read on. Continue reading

Loaning on Foreign Accounts? 6 Ways Credit Insurance Makes It Work

You found a new C&I loan prospect and have an opportunity to grow your portfolio and help a new client at the same time. Then you realize the prospect has a sizable percentage of sales to foreign customers. That means foreign accounts receivable! To give them the amount of financing required, you know you’ll need to loan on the foreign accounts. You get that sinking feeling and begin to realize that maybe this deal won’t happen after all. Oh well, you can always keep prospecting and maybe help the next one?

In the words of ESPN Gameday’s Lee Corso, “Not so fast my friend!”.

Continue reading