Carillion Bankruptcy, a Lesson in Normalcy Bias

Although it isn’t a household name here in the US, the recent Carillion bankruptcy in the UK serves as a warning to us all. A reminder that there’s no such thing as “too big to fail”.

It’s also a case study in normalcy bias, “a belief people hold when facing a disaster. It causes people to underestimate both the likelihood of a disaster and its possible effects, because people believe that things will always function the way things normally have functioned.”

Who is Carillion?

Carillion was one of the UK’s biggest government contractors. I won’t repeat all their statistics here but they had their hand in most major construction projects, facility management and infrastructure operations for the British government. They employed over 43,000 and their collapse “threatens the solvency of hundreds of subcontractors and smaller businesses.” according to the New York Times. Continue reading

Single Buyer Credit Insurance

Single buyer policiesAlmost every month, I’m referred to a business who has interest in protecting their accounts receivable and cash flow using trade credit insurance… but only on a single buyer (customer). The conversation usually goes something like this:

“Yes, I’d like to learn more about credit insurance and how it works. I have this one account that I’d like to look at.”

Single-buyer policies

A credit insurance policy that covers one customer account is called a “single-buyer” policy. Policies that cover more than one account are called… you guessed it, “multi-buyer” policies. Here’s what you need to know about a single-buyer policy. Continue reading

Don’t Let Their Cash Flow Problem Become Yours!

Cash FlowI had a problem. One of my clients had requested insurance coverage on a key customer and after looking at the financial situation, the request was refused. It seems the company wasn’t doing well financially and had become too risky. My problem was that I thought this news may not be easy to share. After all, who likes to be told one of their customers isn’t a good financial risk and is actually in some trouble?

To my surprise, when we got to the subject of the key customer, my client’s reaction was relief! Turns out that at that very time, the customer was asking for even longer payment terms. “I don’t want their cash flow problem to become my cash flow problem”, she said. Continue reading

Economy Nearing the Top – 4 Indicators to Watch

Recently, there have been several signs that we’re nearing the top of the economic cycle. Here are four indicators that the economy is reaching its peak and three things to consider to prepare for the downturn whenever it happens.

Real estate values

Real estate values around the country and here in Nashville in particular are skyrocketing. Both residential and commercial space is increasing in value at an incredible rate but warning signs are starting to appear. The leading topic of conversation here is “do you see any end in sight” to the real estate growth? Continue reading

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.

Continue reading

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