Trade Credit Insurance vs. Risk of Self Insuring

Self insuring is the concept that a business sets aside cash to cover losses incurred due to the default of outstanding receivables. In today’s volatile and uncertain economic climate, there is very good reason to not self insure and every reason to protect your company with trade credit insurance. The primary reason one should not self insure is due to loss of leverage. ‘Leverage’ is the concept of getting an exponential return on your resources through the services of a third party as in the case when you take out a trade credit insurance policy. In a self insurance situation, you are tying up the entire amount of the receivable in question for the entire term of the contract. In other words, your cash is already earmarked to cover your loss in the event of a customer default. On the other hand, with trade credit insurance, you use a fraction of the total value of that contract to protect you against default, allowing you to maintain a cash buffer for miscellaneous expenses. Companies who do not maintain enough leverage in their day to day operations are companies who are not in a position to take advantage of unexpected opportunities. They are also far more exposed to financial disaster. Companies who self insure instead of using trade credit insurance can find themselves in a position where a big loss freezes their ability to expand (or even to operate as normal). That’s the beauty of using trade credit insurance – the cost is just another expense and you never have to fully absorb a loss to your bottom line. In today’s business world, we are seeing a great deal of financial turmoil. The problem for a company who sells goods or services business-to-business without trade credit insurance is the exposure to every financial interruption faced by each and every client. While your company may sell software at the OEM level, your client may provide that software along with service to a mortgage lender who is going bankrupt. Your only way of knowing this is to maintain a large staff to examine the details of a client’s finances, as well as investigate the day to day operations and details of how your clients make their money. Trade credit insurance provides the leverage for a company to use a fixed amount of money to defend against a much greater potential loss. Along with this, it allows a company to stick to its core business instead of delving into the expensive process of learning and monitoring each intimate financial detail of every individual client. Have a question or comment about trade credit insurance? Feel free to contact us using the form to the right or call Trade Risk Strategies 1-888-644-4422. Copyright © 2010 | All Rights Reserved

Credit Insurance: Impact of Bad Debt Loss

What does it really cost your company when your customers fail to pay you? The truth can be shocking. Let’s examine multiple scenarios and the impact on sales due to loss without credit insurance.

LOSS AMOUNT & MARGIN	SALES REQUIRED TO BREAK EVEN
$50,000 loss @ 4% margin	$1,250,000
$100,000 loss @ 4% margin	$2,500,000
$500,000 loss @ 4% margin	$12,500,000
$1,000,000 loss @ 4% margin	$25,000,000

LOSS AMOUNT & MARGIN	SALES REQUIRED TO BREAK EVEN
$50,000 loss @ 8% margin	$625,000
$100,000 loss @ 8% margin	$1,250,000
$500,000 loss @ 8% margin	$6,250,000
$1,000,000 loss @ 8% margin	$12,500,000

LOSS AMOUNT & MARGIN	SALES REQUIRED TO BREAK EVEN
$50,000 loss @ 15% margin	$333,000
$100,000 loss @ 15% margin	$666,000
$500,000 loss @ 15% margin	$3,333,000
$1,000,000 loss @ 15% margin	$6,666,000

These charts illustrate the break even point, in other words, how much additional sales would be necessary in order to break even on a given loss. The impact for many companies to replace these sales can be severe depending on the size of the loss relative to the size of the company. Keep in mind these scenarios assume only one loss at a time – if there are multiple losses within the same year, the effect can be devastating. Simply plug in your own margins and determine the impact unexpected losses can have on your sales, operational costs & cash reserves.

Credit insurance can help prevent these realities from negatively impacting a business. Premiums are easily justified when looking at the excessive costs of not insuring.  These charts illustrate the point that credit insurance makes sense for companies who put themselves at risk selling on open credit terms to their customers.

Have a question or comment about trade credit insurance? Feel free to contact us using the form to the right or contact us directly at 1-888-644-4422.

Copyright © 2010 | All Rights Reserved

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Credit Insurance: The 80/20 Rule

Trade Risk Strategies

Does your company trade with a few large customers?  Is the majority of your revenue from only a handful of companies?  If so, you may be exposing  your business to significant financial risks.

A business is considered highly concentrated, for example, when approximately 80% of a company’s sales is generated by 20% of the total customer base. In other highly concentrated situations, one buyer might make up as much as 30 to 40 percent of total sales. If either of these situations hold true for your business, you could be putting your cash flow at risk without credit insurance.

Companies in highly concentrated situations like these don’t often think about the impact a loss could have to their businesses until it’s too late – and other companies avoid the issue altogether. Yet others plan ahead and absorb the risk themselves by self-insuring and setting bad-debt reserves at extraordinary high levels in the event of a large default. The problem with self-insuring to cover a large loss is that it really doesn’t make accounting sense to set reserves at a level in line with accounts receivable. It’s also doesn’t make sense to subject a company to the potential of such losses particularly when capital reserved for bad-debt reserves could be reinvested into other areas of the business.

Premiums for credit insurance more than justify the coverage. Companies can leverage their premium dollars in ways they are unable to do so when they self-insure. If a self-insured business requires $1,000,000 in coverage on customer X, the business would need to set aside $1,000,000 in reserve capital to offset a loss if customer X defaults. That’s a lot of capital to tie up!  On the other hand, credit insurance would only cost the company $10,000 in tax-deductible premium for the same amount of coverage – that’s a big difference!

Many executives are realizing the benefits of credit insurance as a cost effective solution to reduce high concentrations of risk, free up bad-debt reserve capital, and protect the bottom line from catastrophic losses. Companies with credit insurance are able to balance their portfolios without concern of a major account interrupting their cash flow, or in some cases, putting them out of business.

Have a question about credit insurance? Ask us! Feel free to call us at 1-888-644-4422 or contact us directly by using the form to the right.

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Notable Company Bankruptcies 9/27/2010: Were you protected?

Notable Bankruptcies 9/27/2010

• Blockbuster Inc
• Coast Crane Co
• American Pacific Financial Corp
• Thompson Publishing Group

Notable Rate Changes

• Atlas Pipeline Partners LP
• Blockbuster Inc
• Compucom Systems
• Continental Airlines
• Lear Corp
• Moghan Tribal Gaming Authority
• Standard Oil Co
• Texas Instruments
• United Airlines
• Waterford Gaming LLC

Protect Your Accounts Receivable

Credit Put Options help suppliers manage their accounts receivable and working capital exposure to both distressed businesses and investment grade concentrations.

Credit Put Options provide:

• Up to 100% Non-Cancelable Protection

• Flexible Terms from 6 months to 5 years

• Instant contract execution

Below is a small sample of some companies eligible for Credit Put Options coverage. Protection is provided on many names in various industries – please contact us if you are interested in buying protection on one of the names below or any other names you may be concerned with.

• Bon Ton
• Burlington Coat Factory
• Duane Reade
• Dillard’s
• Dollar General
• Ford
• Goodyear Tire and Rubber
• JC Penny
• Jones NY
• Kmart
• Kroger
• Lucent Alcatel
• Macy’s
• Michaels
• Neiman Marcus
• Office Depot
• Rite Aid
• Safeway
• Sears
• Sprint Nextel
• Supervalu Inc
• Target
• Toys R Us

Contact us today for your custom, no-risk consultation.
1-888-644-4422 | Trade Risk Strategies

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Credit Insurance: The Time Is Now

Trade Risk Strategies

We are quickly moving through the year with many questions and uncertainties. Company bankruptcies are on the rise. Payment default is at an all time high. For businesses trading on open credit terms, there hasn’t been a better time to protect cash flow from losses due to customer non-payment default.

Accounts receivable are an important component of any company’s balance sheet. Cash flow, profitability, and loss avoidance are affected by how well credit decisions are managed. For many businesses, accounts receivable are one of the last major assets left uninsured. Make one bad credit decision and a catastrophic loss could have a serious impact to the bottom line. On the other hand, be too credit restrictive and customers will take their business elsewhere.

Today, having accurate financial information and making proper credit decisions are critically important in protecting cash flow from sudden losses and maintaining a financially strong business. In the United States alone, the number of bankruptcies continues to rise, with over 60,000 corporate bankruptcies filings projected by the close of 2010. These are staggering numbers, considering in 2009 there were 55,000 business filings, and in 2008 over 34,000 filings, according to the Administrative Office of the US Courts.  But bankruptcy is only part of the problem. There are businesses operating today that are considered financially distressed, paying habitually slow, which, for the company holding the delinquent receivables, can cause significant cash flow problems and/or unexpected business interruption, and in some cases, outright failure.

While this reality may sound bleak, it doesn’t have to be this way. If your company ships on open credit terms to your customers, there’s no reason to shoulder the risk yourself.   Credit insurance can help your company protect itself from these unexpected events.  In exchange for premiums between .25 – 1% of annual sales, your credit insurance policy lets you transfer the risk of “doing business” to another entity,  guaranteeing that you’ll be paid for the products and services you sell.  Using it as a sales tool, you can ship freely to existing customers without risk of loss,  while creating brand new opportunities selling to customers who were considered too risky in the past. Whether selling domestically or abroad,  credit insurance can easily help you gain market share over competitors who restrict their own sales because they don’t have the same insight as you, and do not yet have credit insurance protecting their own accounts.

With the benefits associated with credit insurance, and there are many, it’s a product that is often misunderstood. Oftentimes, when credit and financial executives enter into discussions about credit insurance, a general assumption is made that customers with long time, positive trading histories will never default.

Here are some typical responses from executives regarding the subject:

• “I’m not worried about our major accounts, we’ve been doing business with these customers for years.”
• “Our key buyers never miss a beat and always pay within terms. We have great relationships with all of them.”
• “If any of my top customers filed bankruptcy tomorrow, it would hurt not only my business, but every one of my competitors businesses as well. That’s the only insurance I need.”

While the confidence these executives have in their customers’ ability to pay their trade obligations is understandable, the justification is not.  This is because credit insurance companies see an entirely different story. Businesses of all shapes and sizes, no matter where they trade, experience pressure from many sources — shrinking margins, higher operating costs, stiff competition, and poor collection recovery on their own receivables.  Any one of these conditions can develop into significant cash flow problems for any business causing that “perfect trading relationship” to fail unexpectedly.

A company’s ability to pay their trade obligations has very little to do with how large they are or how long a trading relationship has been established. Today’s economic and financial pressures can take down even the largest 600lb gorilla – and any supplier without protection on their accounts receivable could easily experience business interruption or outright failure, particularly in highly concentrated situations.

Credit insurance companies are seeing business defaults more frequently than any other time in history.  To offset the effect of this for policyholders, accurate and up to date trading histories on companies are maintained,  identifying firms that are habitually delinquent in paying their suppliers. This is critical information – as it provides an early warning system to policyholders to help with their credit decisions.  This data also allows credit insurance companies to analyze trends and identify companies that may have just defaulted with other vendors. History shows that even if these defaulting companies continue to pay only a handful of suppliers, they’ll likely stop paying all their vendors in the near term.

For the executive who believes to have a stellar trading history with a large, key account, how valuable would this information be upon discovery that this same account recently defaulted on payments to 30 of their other suppliers? Priceless, especially when it’s realized that they’re probably next in line.

Partnering with the right trade credit insurance company with access to critical buyer information can help steer a business away from unnecessary financial risk. This kind of business intelligence combined with credit insurance protection makes smart business sense for today’s corporations.

Have a question about credit insurance? Feel free to call us at 1-888-642-4422 or contact us directly by using the form to the right.

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