Dec 14, 2015
By Aaron Lindstrom, Euler Hermes
Few companies can effectively compete without extending credit to their buyers. But each time a business grants credit to a customer, it is taking a chance that the debt will not be paid. This creates risks for the business’s cash flow and profitability, since one large unpaid invoice may have the potential to impact the bottom line, halt growth, or even trigger insolvency. Representing up to 40 percent of a typical company’s balance sheet, accounts receivable (A/R) are naturally both a vital and vulnerable component of a healthy business.
In the face of today’s changing economic climate, recognizing and managing future A/R risks needs to be a priority for many businesses. Long lead times that require protection on work in process and longer terms of sale can create high receivables balances and increased credit risk. Exporting to foreign markets only compounds the risk by bringing country and commercial threats that can blindside your business. Executives must continuously balance the benefits of sales growth with the associated risks.
By implementing a credit insurance policy, you can eliminate the risk of nonpayment of commercial debt. Credit insurance makes sure that your invoices will be paid and allows you to reliably manage the commercial and political risks of trade, resulting in safer and more strategic accounts receivable management.
A credit insurance policy helps ensure that a company is growing sales safely, domestically and abroad, to new and existing customers. The key is using our proprietary information about companies, sectors, and economic trends in order to make informed credit decisions, minimize losses, and expand into new markets. This can help businesses cultivate clients in sectors or geographies that are outside its traditional client base. For companies that currently sell on an export basis, this can help improve their competitiveness by offering open terms when letters of credit or prepayment may have previously been the only safe way to do business.
A credit insurance client, Doug Konop, CFO, Specialty Forest Products, explains; “Credit insurance provides us the speed and financial strength to offer competitive terms and go toe-to-toe with our biggest competitors. It also provides us the knowledge we need to go after the right customers – ones who were previously overlooked. Instead of losing customers because of our conservative limits, we can now focus the conversation on what we do best: service, product, and pricing.”
Credit insurance not only provides protection in the case of customer default but also helps optimize your credit function support. As a virtual extension of your company, a credit insurance company provides the insight and resources you need to manage, maximize, and protect your receivables. Insurance company underwriters are industry specialists who will work closely with you to deliver in-depth credit analysis and ongoing account monitoring to provide early warning of potential credit risks before they become a loss.
A credit insurance customer, Chris Lewon, Owner-Operator, Utah Metal Works, elaborates; “Even after being in business for almost 60 years, we still make mistakes; there are things you cannot see with a basic credit department,” said Lewon. “Euler Hermes, our credit insurer, provides us with a vast amount of resources. It’s an insurance policy as well as a credit department. The company works with us to get the best coverage for our accounts and cover us if a loss does happen – that’s where the value comes from. It’s a much better strategy than what we had before and extremely warranted.”
Aarron Lindstrom, I am the Pacific Northwest Risk Management Consultant for Euler Hermes North America. I consult companies of all sizes and in all industries helping them trade with confidence and strategically grow their business at home and abroad. Euler Hermes is the largest carrier of trade credit insurance in the world. With an investment-grade AA- rating by S&P and the financial backing of our parent company, Allianz.