In a nutshell, Credit Insurance exists to protect businesses
from non-payment of invoices, and can be a useful tool in helping to develop
trust relationships with new overseas selling partners. My first experience of
the value of credit insurance came when I started work as Export Sales Manager
for a textile company. Our biggest ‘export’ customer was a distributor in
Ireland who had really enjoyed a life of Reilly for some time, stretching
payment terms and exceeding their insured credit limit, and generally giving my
predecessor the runaround. Well as a new kid on the block you want to start
with a clean slate don’t you? I looked at each export account and quickly
realised that our biggest export customer was also our biggest export problem!
So when they wanted their next order to be released I
blocked it, refusing to allow any goods to move out of our warehouse in their
direction until they had paid out sufficient invoices to bring their account
back within the terms of the credit insurance cover that Atradius provided. It
can be quite funny, if also a little sad, listening to excuses and promises
when somebody knows they’ve been rumbled, and it was all hot air and a waste of
telephone time, because in the end the goods were not going anywhere until the
money was paid.
Those decisions pretty well finished the relationship with
the distributor because they had been biting off more than they could chew with
large Irish contracts for far too long, so I had some hairy moments explaining
that away while simultaneously spreading the risk across a larger number of
more reliable selling partners. However, because I had forced the issue and
ensured that payments were back within agreed limits, when the company finally
did go bang the following year, Atradius paid out 85% of our exposure –
significantly better than the alternative!
Each company has to make its own judgement as to whether or
not credit insurance is right for them. Some prefer to self-insure or to
provide open account facilities because they know well the reputations of their
selling partners. Some might opt for the security of payment by Letter of
Credit (LC) for larger orders. Others prefer to be paid in advance because they
do not have sufficient trust in their selling partners. Experience teaches us
that there is no single right answer, therefore I have tended to apply for
credit insurance cover when I have felt it is needed, and also to give new
distributors a little flexibility in order to demonstrate payment performance.
I worked very successfully with a Turkish distributor for a
number of years. At first, payment terms were payment either in advance or by
LC. As the relationship built and strengthened, and because we could not obtain
credit insurance at that time, we agreed a £10,000 open account limit so that
the distributor could take smaller, regular orders, with all remaining orders
being paid for by LC. After three years of successful trading and on time
payments, the open account limit was increased and we were able to achieve a
small amount of credit insurance cover. The insurers looked at the usual
criteria of country risk, company risk, etc., but also at the way the account
had been managed between ourselves and the distributor. By building a relationship
with the credit insurer we were able to give them the confidence that offering
limited cover was worth their risk.
That illustrates one incidence where initial refusal by the
credit insurer did not necessarily reflect on the distributor’s willingness or
ability to pay their bills on time. It is very important to note that credit
insurance can be refused for a whole variety of reasons, and that decisions can
change according to political and economic circumstances, and individual
company performance. I was once refused credit insurance on a French
distributor who the company had been working with for many years before I
joined.
The reason for the refusal was not a reflection of their
payment record, but more a question of the total exposure to Atradius of that
one distributor. They distributed a wide range of products into the French
construction sector, and a number of other companies had beaten me to the draw,
each securing credit insurance on their business with them. So the insurance
company looked at the collective risk of all those policies, and took the
decision that they were already risking enough!
Why did I suddenly apply for credit insurance cover on a
distributor who had been working with my company for some time? Well it is
quite simple. A distributor whose track record was with regular smaller orders
suddenly won a much larger order, and it was necessary to ensure that the
company had the ability to pay. My choice became a simple commercial one,
whether to accept the order or risk losing prestigious business with Societe
Generale in the Trocadero Building in Paris. So we agreed stage payments that
helped to minimise the risk of non-payment, with the amount of the first payment
being covered by a Bill of Exchange, and covering our manufacturing costs.
So what are the lessons learned:
- Don’t take a refusal of credit insurance as necessarily a negative thing
- Be prepared to use a variety of methods of securing international payments
- Manage your accounts within agreed insurance limits
No comments:
Post a Comment