http://www.metalcenternews.com RSS feeds for Metal Center News 60 http://www.metalcenternews.com/Editorial/CurrentIssue/June2012/062012BusinessTopics/tabid/5810/articleType/ArticleView/articleId/7383/Do-You-Need-Trade-Credit-Insurance.aspx#Comments 0 http://www.metalcenternews.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=5810&ModuleID=13949&ArticleID=7383 http://www.metalcenternews.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=7383&PortalID=51&TabID=5810 http://www.metalcenternews.com/Editorial/CurrentIssue/June2012/062012BusinessTopics/tabid/5810/articleType/ArticleView/articleId/7383/Do-You-Need-Trade-Credit-Insurance.aspx Do You Need Trade Credit Insurance? Is it worth the cost to insure your receivables? Proponents make a strong case for the value of a credit insurance safety net. By Tim Triplett, Editor-in-Chief Bill Vitucci, vice president and CFO of Vitco Steel Supply Corp., recalls the unexpected and shocking failure of a long-time and loyal customer, which led to his company’s investment in trade credit insurance six years ago. “It was an awakening,” Vitucci says “You can talk about partnerships and win-win situations, but in reality there is no such thing. People are out to protect themselves and their employees before they will worry about their suppliers. When they hit times of trouble, the last people they will take care of is their unsecured creditors.” Vitco, based in Posen, Ill., insures its receivables with Euler Hermes, which claims to be the world’s leading trade credit insurance company. Other major insurers of accounts receivable include the Atradius Group, headquartered in Hunt Valley, Md., and Coface North America Inc., East Windsor, N.J. “All we do is insure companies against abnormal or catastrophic bad debt losses,” says Jim Furio, regional vice president for Euler Hermes, which has an office in Lisle, Ill. Credit insurance can provide metals distributors with four key benefits, he explains: greater peace of mind, operational efficiencies, improved bank financing and sales expansion. Perhaps the most direct benefit for a small-business owner is the emotional effect of knowing that if a large account goes out of business or otherwise fails to pay its bills, the result will not be devastating. “One service center client told me, ‘this will be the first good night’s sleep I’ve had since I started the company seven years ago’” recalls Lee Fahrenz, a senior agent with Euler Hermes. Euler Hermes becomes an extension of its clients’ credit departments, Furio says. The insurer maintains a giant database on companies’ payment histories and has automated tools that rate buyers on a 1-10 scale of risk, so service center salespeople can make quick decisions about how much credit to extend to new accounts. “A user can go on line to look up a buyer’s risk rating and get immediate approval for customers under $25,000,” Furio says. Bankers have a favorable view of credit insurance. If they know a service center’s accounts receivable are insured, they will be more willing to lend that company money. More access to capital means more opportunity to grow. “If you insure your receivables, you are in a stronger position to negotiate with the bank for better credit terms. The bank sees this as a risk mitigation tool, while the service center sees it as an opportunity to leverage the banking relationship,” Fahrenz says. Which leads to the ultimate benefit of credit insurance, say Furio and Fahrenz: sales expansion. Credit insurance can more than pay for itself by giving a service center both added buying power and added selling power, they maintain. For example, a bank typically may loan a metal distributor up to 75 percent of the value of its receivables on an asset-based line of credit. But knowing those receivables are backed by an insurance policy, the bank may up the loan to 85 percent. In the case of a small company with $4 million in outstanding accounts receivable, that 10 percent difference amounts to an additional $400,000 in liquidity that could be used to expand sales. “Most banks won’t even consider foreign trade receivables as collateral, but they will if they are insured,” Furio notes. Like bankers, most service center executives are averse to risk. But with the backing of a credit insurer, it’s easier for them to extend additional credit to existing customers and to be more aggressive in selling new accounts, Fahrenz says. “At most companies, sales has one foot on the accelerator and credit has one foot on the brake. If you don’t have an account’s financials, you may hold them to a $50,000 credit limit to be safe, even though you know they would buy more if they could. If Euler Hermes says a customer is good for $100,000, why not sell them $100,000?” In such a case, if that translates into an extra $50,000 in sales to an account that turns over six times per year, the service center could boost its revenues by $300,000. At a 20 percent gross margin, that amounts to an extra $60,000 in gross profit for the year. Thus credit insurance is not just for service centers that have had bad-debt issues. “If they have not had bad debt write-offs for years and years, that tells us they are probably running a pretty conservative credit shop. If they can use this as a tool to take on more risk safely, they can ultimately put more profit to the bottom line,” Furio says. Vitucci agrees that having credit insurance can actually help a service center expand its business. “I might be comfortable selling all my accounts on a $30,000 or $40,000 credit limit, but if I can get credit insurance for $100,000 or $150,000, I go for the coverage. That allows me to build a rapport with that customer and maybe become one of their main suppliers.” Vitucci is also a member of the National Association of Credit Managers, which also maintains a database on industrial companies and their credit histories. NACM provides information to members that can alert them to high-risk customers before they supply them with material. “Some people view that as double coverage, but I find it incredibly beneficial to have both,” he says. Service centers cannot simply insure their questionable customers. The credit insurer generally bases its premium on the client’s total annual sales volume. Like health or auto insurance, where the buyer may opt to pay a large deductible to keep the premiums low, a credit insurance buyer may only choose to get coverage on large accounts, say those with over $100,000 in exposure. The cost of each policy varies from company to company, depending on its size and risk profile, but a credit insurer typically charges from one-tenth of a percent to one-third of a percent of a client’s annual sales. Therefore, a $10 million company charged 25-30 basis points would pay $25,000 to $30,000 annually. A $100 million company might pay 12-15 basis points or $120,000 to $150,000 a year. The more risk the client is willing to shoulder, the lower the premium. A 10 percent co-insurance is common, where the insurer carries a 90 percent indemnity. The insured can usually file a claim on accounts that are over 60 days past due. One common misperception is that a trade credit insurer will force a client to change the way it operates. Most owners do not want some insurance company poking its nose in their business. In fact, owners are free to continue making both business and credit decisions, say Furio and Fahrenz. Euler Hermes just insures the credit ones. “If a policy holder asks for $200,000 coverage on a particular buyer, and we only approve a $100,000 credit limit, they can still ship whatever they want. They can make the business decision to take on the risk for the other $100,000. We don’t tell our clients who they can or can’t ship to, or how much. We just help them make a more educated choice on their business decision,” Furio says. Vitucci is convinced his investment in credit insurance has paid dividends, even though Vitco has never filed a claim. He takes it on faith that his company has avoided potential losses because Euler Hermes’ underwriters have steered Vitco away from risky customers. “I believe I have saved money by not selling to certain companies. I might get three trade references from a customer, but they will only give me the good ones. I won’t know about the 12 other people they owe excessive money. But the credit insurance company will.” Perhaps the best dividend of credit insurance is psychological payoff, he says. “You are buying comfort and security, being able to sleep at night knowing that if you do experience a loss, it is not going to be the one that puts you on the other side of the aisle in bankruptcy court.” Tue, 31 Jul 2012 20:11:00 GMT f1397696-738c-4295-afcd-943feb885714:7383 http://www.metalcenternews.com/Editorial/CurrentIssue/June2012/062012BusinessTopics/tabid/5810/articleType/ArticleView/articleId/7382/AISI-Leaders-Outline-Policy-Steps-Needed.aspx#Comments 0 http://www.metalcenternews.com/DesktopModules/DnnForge%20-%20NewsArticles/RssComments.aspx?TabID=5810&ModuleID=13949&ArticleID=7382 http://www.metalcenternews.com/DesktopModules/DnnForge%20-%20NewsArticles/Tracking/Trackback.aspx?ArticleID=7382&PortalID=51&TabID=5810 http://www.metalcenternews.com/Editorial/CurrentIssue/June2012/062012BusinessTopics/tabid/5810/articleType/ArticleView/articleId/7382/AISI-Leaders-Outline-Policy-Steps-Needed.aspx AISI Leaders Outline Policy Steps Needed for Domestic Manufacturing to Flourish A strong and broad-based domestic manufacturing policy is one of the primary goals of the U.S. steel industry, one to which associations such as the Washington, D.C.-based American Iron and Steel Institute devote considerable resources. Some of the biggest names in the steel industry addressed the media in a joint press forum last month, outlining what they believe are the steps necessary for the country to develop a more pro-manufacturing business climate. Four main policy areas demand attention from the federal government, they said: Fair Trade “The fact is U.S. steelmakers and their workers can compete with anyone in the world, as long as we have a level playing field. We cannot compete against governments that rig the market to their advantage,” said Dan DiMicco, chairman and CEO of Nucor Corp., Charlotte, N.C. AISI, he said, supports rules-based free trade, strong laws against unfair and injurious surges, and strictly enforced trade agreements. The group asks the federal government to combat currency manipulation and other protectionist practices by foreign competitors. DiMicco said 80 percent of China’s outward investment is done by state-owned enterprises. The SOEs have advantages that most shareholder-owned companies do not, including access to cheap capital from state-owned banks, free land and subsidized energy. “It’s OK if the product is produced and sold at home. But when it’s exported, it goes against our country’s and WTO’s rules and laws governing exports,” DiMicco said. “To address SOEs, we need Congress, the administration and federal agencies to work together to ensure healthy, balanced global trade.” Energy While a comprehensive national energy policy has long been a goal of the steel industry, when it comes to the growing shale gas sector, the steel industry would prefer the federal government to stay away. “From a policy perspective, the states where shale production has taken place already have robust regulatory programs in place, and others are in the process of upgrading these structures,” said John Surma, chairman and CEO of Pittsburgh-based U.S. Steel. “The process is working. The regulation of shale gas resource development is best dealt with at the state, rather than federal, level.” Of course, the federal government will continue to play a role in energy. At the moment, the industry is concerned about new EPA regulations on coal-generated electric facilities, regulations that could result in up to 32 facilities shutting down. “AISI and other industrial groups are concerned the rules could have a negative effect on the availability and reliability of electricity supply, and the rules would likely result in higher power costs,” Surma said. “For an energy-intensive sector such as steel, it would detrimentally impact the industry’s competitiveness.” Tax Policy Recently, pro-business groups have proposed reducing the corporate tax rate from its current level of 35 percent—the highest in the developed world, AISI noted—to 28 or even 25 percent. While the steel industry supports a reduction in the corporate rate, some of the proposals on the table would simply exchange one uncompetitive situation for another, the association argued. “Many of these proposals seek to pay for that rate cut by eliminating a number of corporate credits and deductions that are critical to promoting investment and creating jobs,” said Joseph Carrabba, chairman and CEO of Cleveland-based Cliff’s Natural Resources and the chairman-elect of AISI. “If not properly structured, swapping credits and deductions for a lower rate could result in a net tax increase on capital-intensive companies such as those represented here.” Instead, AISI supports corporate tax reform that creates an environment for American companies to increase production and exports. “To do this, Congress must put together a tax reform plan that improves our competitiveness relative to our major global trading partners and does not result in a net tax increase on companies that add value to our economy,” he said. Infrastructure The steel industry entered 2012 with the expectation that non-building structures such as highways, bridges and water-supply infrastructure would enjoy a healthy growth rate of 6 percent. But that was predicated on the successful passage of a well-funded surface transportation bill in advance of the highway construction season. Instead, Congress has only produced a series of short extensions. “These extensions do not provide the boost our economy needs,” said Mike Rehwinkel, president and CEO of Evraz North America, Chicago. “We need a long-term bill with a level of funding that allows the states to plan the big construction projects that produce valuable jobs and generate demand for steel, concrete and other materials.” Even if Congress is able to pass an adequate bill, it may be too late to provide the necessary boost this year, he noted. “We must make rebuilding our crumbling transportation infrastructure system a top national priority,” Surma added. “It is essential to be able to do business efficiently within our own borders in order to maintain our dominant role in the global economy.” Sign of Hope While much work needs to be done in these areas, there is slightly more cause for optimism this year than in the recent past, noted one of the panelists. “Both presidential candidates are putting forward in their platform a strong message that manufacturing is critical to job creation, wealth creation and economic growth,” DiMicco said. “That’s new, and a major success for people who have spent a decade trying to convince folks there’s a real issue here.” DiMicco said both candidates have been critical of China’s trade practices, among other concessions to manufacturing’s needs. Moreover, he believes the electorate is also mindful of the need for better leadership on these issues. “These aren’t just words in an election year,” DiMicco said. “The American people are going to demand that whoever becomes president acts on these words in a strong and effective way.” Ultimately, he said, “it’s going to take government-to-government interaction and government-to-business leadership to really effect the change we need to get manufacturing back to being 20-plus percent of our GDP.” Tue, 31 Jul 2012 20:08:00 GMT f1397696-738c-4295-afcd-943feb885714:7382