When many companies take a hard look at their customer bases and accounts receivable aging reports, they, typically state or feel: “My customers are good… I’ve done business with them for years… and/or I’ve not had any write-offs…”
I have 2 words for those thoughts….PINK SLIME!
As you probably read or heard on TV, Pink Slime was filler used in ground beef. It was waste products from the cow that were “cleansed” with ammonia hydroxide and added to the final product.
AFA Foods in Pennsylvania was one of the largest producers of ground beef that utilized this chemically treated filler, and, prior to the negative reaction of Pink Slime, they were a very profitable entity. They produced over 500 million pounds of this product annually! If you were a company selling to AFA Foods, you probably didn’t worry about their credit-worthiness or ability to pay. They were a good customer!
Because of the public outcry regarding Pink Slime, AFA Foods lost contracts with customers including McDonalds, Burger King, and Taco Bell. The result of this bad publicity and lost business was a bankruptcy filing for AFA Foods on April 2, 2012.
Who’s the potential AFA Foods in your customer portfolio? Which of your large customers have a large customer that, if they lost them whether through bankruptcy or they moved their business from your customer to another vendor, would put them into financial peril?
Despite historical evidence of healthy companies (eg, Arthur Anderson, Lehman Brothers, and Solyndra with their $500+ million in US gov’t loans!) quickly and unexpectedly filing for bankruptcy, many companies still take the “it will never happen to me” approach. Indeed, the risk of a serious or even devastating default by a customer is more likely than theft, fire, or flood.
I encourage companies to ask themselves the hard question: “What happens to my company if one of my largest customers unexpectedly files for bankruptcy?”
What Is Your Plan If / When This Catastrophe Occurs?
You can protect against this kind of business event and your company’s future with a Credit Insurance policy. The product itself is relatively straightforward. If a customer defaults or does not pay, your company still gets paid. The task of collecting is then left to the insurer.
Mitigating the risk of a bad debt is just one of the benefits of a Credit Insurance policy.
Many companies use credit insurance as a financial tool to improve their own credit profile. With their accounts receivables (A/R) insured, banks are willing to offer them much better terms for financing and/or include previously ineligible A/R (foreign A/R, domestic concentrations) in the borrowing base. In fact, some banks even require companies to obtain Credit Insurance as a condition of lending.
Most of the larger Credit Insurance companies maintain credit histories on literally millions of companies. They can help their policyholders decide who they should and should not extend credit. Some insurance carriers can even assume responsibility for collections.
Finally, with domestic markets becoming saturated, American companies are increasing exports. Foreign sales by small and medium-sized companies are up 20 percent this year alone. Many of them are finding that Credit Insurance is a must. First, it protects the exporter from non-payment or customer insolvency. It also is much faster and easier to use than old-fashioned credit risk mitigation tools like letters of credit, which can be burdensome and tie up their customer’s bank line. The insurance allows the exporter to offer open-account terms to their foreign customers, and the cash-flow benefit to these companies can equate into their ability to buy more product! By offering open-account terms, a company is also able to compete head-to-head with foreign competitors.
Like it or not, the global economy has changed for good. Market conditions are much more volatile. Credit will remain tight for the foreseeable future. If you want a tool to support and enhance your company’s credit management department while protecting against a significant non-payment, Credit Insurance can protect your company’s future!
For more information, contact your Gibson risk advisor or email Rick McNamara directly.
