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Managing Risk: Credit Insurance

Buying Peace of Mind

By on
MCN Editor Beth Gainer
Credit insurance can help companies in many ways – from mitigating risk to growing sales.

In the unpredictable world of business, company owners want peace of mind. For many in the metals industry, that means purchasing credit insurance to mitigate a major business risk – non-paying customers. 

“Credit insurance pays you when your customers can’t pay you back,” says Lee Spurrier, senior vice president chief sales officer – U.S. for Coface, a company with a large global presence. Headquartered in Paris, Coface operates in 65 countries, and its metals industry clients are in the Top 10 of the company’s portfolio.

Mike Dodson, senior regional manager sales for Atradius Trade Credit Insurance, Inc., Carmel, Ind., agrees that having credit insurance buys reassurance. “Business owners sleep better at night knowing they’re going to get paid for what they sell,” he says. 

Atradius operates globally and throughout the U.S., with most of its business being domestic. The metals industry is the No. 3 sector the company serves. Dodson says in his region of the country, metals clients comprise approximately 30 percent of his business. 

Of all the reasons companies purchase credit insurance, the main one involves reducing unexpected and large bad-loss debt. According to Spurrier, companies purchase credit insurance to avoid losing large amounts that would impact their cash flow. Dodson concurs. “Most companies insure every asset on their balance sheet, and their accounts receivable is a large asset that can be protected as well, so we simply help them mitigate the bad-debt loss risk of doing business,” he says.

Ideally, a business will never have to file such a claim. But in the event that a claim is necessary, the typical amount a credit insurer will pay is 90 percent of the risk. The business will need to pay a 10 percent co-insurance. Some policies are structured to have an annual deductible in addition to the co-insurance.

With Euler Hermes in Lisle, Ill., clients must file the claim within 180 days of the date of supply. “We want to give you [as a client] every opportunity to collect on your own without our involvement  because you don’t want to pay a collection fee to a collection team,” says Sales Vice President Lee Fahrenz. 

A high percentage of Fahrenz’s clients are in the metals industry. In fact, he is well-immersed in the industry, serving on the board of the Fabricators & Manufacturers Association. Eighty percent of the company’s policies is domestic. And potential lenders often look to Euler Hermes to find out the credit worthiness of a business. “We’re like Dun & Bradstreet on steroids,” he laughs.

Expecting the Unexpected
The uncertainty of the pandemic found businesses with credit insurance submitting claims. Many companies shuttered or slowed down, resulting in unpaid customer invoices. “We have received numerous claims this year in the metals segment,” says Spurrier. “These can range from tens of thousands of dollars to hundreds of thousands of dollars to millions of dollars, so clearly the key about having insurance is when the unexpected happens, that’s when you want to have your insurance policy.” 

Fahrenz says the ongoing pandemic caused the same feelings of panic as the financial crisis of 2008 to 2009. “Cash flow, the lifeblood of every business, is impacted now,” he says, adding that once the coronavirus hit, many business owners in the metals industry quickly contacted their financial institutions and investors and reached out to customers  “Everyone in metals said, ‘I wound up talking to my customers and learning about what’s going on more than I’ve ever done.’ They asked their customers, ‘How are you doing?’ ‘Can you pay me?’ There was a huge focus on how they were going to get paid.”

Bad-debt loss is just one reason for companies to purchase credit insurance, according to the experts. Another reason businesses purchase credit insurance is that it makes them attractive to financial institutions.

Fahrenz emphasizes that banks and other finance companies feel favorably toward businesses with credit insurance, adding that about half of the policies he writes have a bank beneficiary attached to them as an endorsement. Banks and other lending institutions feel good that a company has mitigated risk, so they might be more willing to give the business a higher advance rate on its line of credit. “Having access to more working capital does give [businesses] an advantage. It’s just a function of the policy,” he says. 

In addition, many customers are using credit insurance to grow their businesses. “Every service center wants safe and aggressive growth, particularly in an uncertain economy, and that is really where we are today,” says Fahrenz. 

Coface has found that some of its clients have doubled and tripled their businesses, just because they are comfortable offering credit terms. That has allowed them to win business and grow their sales. 

According to Dodson, Atradius has many clients who have used credit insurance as a sales tool to get more aggressive with increasing credit limits to new and existing credit-worthy customers. “If a new customer wants to offer extended terms, they can get coverage on that customer in advance and be confident doing so knowing the customer is insured. This can help win the deal over the competition,” he says. 

Companies who already have used credit insurance for financing purposes often find themselves with an advantage over those that do not.  “We’ve faced an unprecedented crisis this year when everything shut down,” says Spurrier. “First of all, in this pandemic, having credit insurance – for those who used credit insurance for financing purposes – allowed them to maintain their lines of credit. So, again, having that collateral base protected by Coface allowed our clients to continue to have access to capital despite the changing market conditions.”

Some businesses leverage their receivables as the collateral and with Coface credit insurance, they can often achieve more attractive financing terms from the lender. “Lastly, for a lot of businesses, they like using our credit expertise to help them set and monitor credit for their customers,” says Spurrier.

Atradius offers its clients an online portal to assist them with credit management efficiencies and allows them to monitor their customers’ credit. “They can vet new prospects very quickly without having to chase bank and trade references or try to get the financials on their own, so we streamline that process,” says Dodson. “They are able to use the portal to vet customers quickly and accurately, guaranteeing payment, which will hopefully afford them to be more aggressive and sell more.”

Risky Business
Experts constantly monitor the Days Sales Outstanding, advising clients to be aware of red flags that might indicate their customers are struggling. Common red flags to watch out for are if a customer has slow or late payments, is losing market share, has cash flow problems and/or insolvency, as well as exhibiting behavioral changes, such as phone call and email avoidance.

Another risk involves doing business overseas. 

“Companies that sell domestically are more comfortable understanding how they may get their unpaid debts. Once you step outside your border, you encounter a whole new land of credit risk, business practices and collections processes, so you’re really going into a new world,” says Spurrier. “Collecting debts in the Middle East is a lot different than collecting debts in Chicago.” 

And credit insurers are wary about offering coverage for companies in certain geographic areas of instability. “Our risk underwriting strategy is cautious in third-world markets and countries with high levels of political risk,”  says Tim Moore, senior underwriter North America at Atradius Hunt Valley, Md. “An example of this would be Venezuela, as the region has civil and political unrest, along with high levels of fraud. We have a team that assesses risk by region, and we release a quarterly update for our team and our customers to review.”

“We follow guidelines set by the Office of Foreign Assets Control very closely,” he adds, “as we cannot have any dealings with Specially Designated Nationals or businesses heavily linked with SDNs.” 

And risk underwriting during COVID-19 poses its own issues. “COVID-19 has been a challenging time for the sector due to the decreases in demand and pricing across the market. We have seen significant bounceback during Q3 and Q4 2020 in pricing as the market begins to ramp back up inventory levels to pre-COVID levels, causing a shortage,” says Moore. “We maintain a cautious approach to suppressed markets, but our primary focus is on the health of the business in question rather than their customer base.”

Other factors affect how a credit insurance company perceives a company’s credit risk. “Atradius takes a holistic approach to underwriting, and this especially holds true in the steel/metals market,” says Moore. “We rely on payment history, end market concentration and overall business health to assess risk.” William Bruns, underwriter – North America Atradius’ Hunt Valley, Md., agrees. “We’re looking at what [businesses] are selling into, what the products are going to be used for and how COVID and the current economic environment has affected those buyers and the markets at hand,” he says. 

“One [industry] that we’d be pretty wary of is the oil and gas [sector] right now.”

Once an insurer does its credit risk assessment on a company’s customers, the insurer will come up with a determination for possible coverage. Atradius will “come back with full coverage, partial coverage or no coverage and why,” says Dodson, adding that this no-obligation application process enables potential clients to easily see what a policy would look like. “It’s a worthwhile exercise, whether they move forward,” he says.

Indeed, receiving a no-obligation credit-risk appraisal is useful, according to experts,  because it provides information.  “I would encourage service centers in particular to invest the time and effort to see if the benefits are worthy of the policy,” says Fahrenz.

In addition, Fahrenz believes people mistakenly believe that credit insurance offers only bad-debt protection. “I don’t sell bad-debt protection. [Credit insurance] is just a function overall of accounts receivable management of the business,” he says. “We become a partner in [a company’s] credit department by giving them access to the resources. It’s not just sales growth, but we’re enhancing the efficiency of your in-house credit team. You’re tapping into our resources and credit intelligence.”

Perhaps Dodson’s statement about credit insurance helping business owners sleep better at night rings true. As Fahrenz’s former manager used to say, “A receivable is a promise to pay. Insurance gives it a confirmed value.”