Risk management often requires a counter-intuitive approach, challenging ourselves to think through whether we have accurately assessed the possible risks that face our businesses. Planning for a range of outcomes requires an evaluation of downside risk. This runs counter to the optimistic view we naturally have for our efforts in building individual enterprises. Yet the recent bankruptcy of Toys-R-Us highlights why, even when times are good and indicators seem positive, “black swan” events can happen. The time to plan for those events is ahead of the crisis.
Imagine the scenario: It is August 2017. As the CEO of a toy manufacturing company, your firm is coming up on the biggest, most lucrative season of the year – the December holidays. Irrespective of tradition, the bringer of gifts will need some 21st century manufacturing support — your toy company is just the one for the job!
Knowing the retail toy sector is largely seasonal, your company team understands the traditionally longer manufacturing lead times needed to stock store shelves. They have worked hard, marketed and won contracts from the major toy retailers in advance of the big season. Your company also anticipated the early holiday shoppers and made sure products will be delivered by the middle of September. It is this holiday-season Accounts Receivable that will fund your firm’s working capital throughout a good portion of next year.
Now ask the question: Do you need trade credit insurance on those Accounts Receivable? Is it a luxury or a necessity? There is market concentration with a historically large buyer that could not possibly file for bankruptcy right before the holiday season, the best time of the year. You decide to gamble with that thought in mind.
Your CFO, however, has been reading the trade press on the difficulties facing the retail sector, as the major box stores wither under cost competition from online retailers. She recommends you take a look at insuring buyer risk, just in case retailing has indeed crossed a Rubicon and become an online enterprise. The is not really the news you want to hear going into the busiest season of the year — but then again, you made her CFO because she is willing to bring you the hard news. With a quick call to your broker, you are able to line up a trade credit solution covering the risk concentration associated with a large buyer. As it turns out, this one call can be the move that saves your toy company. Unlike many of your competitors, you will now get paid for the shipped merchandise.
When everything is going well, accounts receivable are being paid and aging accounts are small, trade credit insurance might look like a luxury. However, it is also a good time to review your options and risks with an experienced trade credit insurance expert at Securitas Global. The premium rates can be lower with greater underwriting capacity. Even more importantly, markets recognize the value of supporting existing clients on credits like Toys “R” Us. Just prior to the bankruptcy filing, our Securitas Global team heard comments from vendors with respect to getting trade credit insurance on Toys-R-Us that included: “It’s expensive” and “We’re concerned, but we don’t think they’ll file yet.” When it became clear there would be a loss, and insurance was no longer available since underwriters will not insure a certain loss, the cost of protection became secondary. The conversation became one of whether any available coverage options existed.
The moral of the story: The time to put trade credit insurance in place is before there is a known risk. As one client shared “I have too much invested in my business to risk it because one of my customers can’t pay me.” Securitas Global can develop a customized solution to cover your needs at the right price point. We work with clients to determine their level of risk and how to allocate it then devise a policy that will cover their specific needs. This can include coverage for overseas buyers and ways to mitigate political risk. By insuring accounts receivable, we are able to preserve your firm’s working capital and support credit access.
Securitas Global Risk Solutions is delighted to announce that Pamela Bates has joined our team to provide customized solutions to mitigate credit and investment risk in global markets. Pamela will be based in Virginia, where, in addition to risk mitigation, she will provide strategic and policy advice to assist our clients in navigating international business opportunities. Working for the U.S. Department of State for over two decades as a foreign service officer, Pamela managed U.S. diplomatic efforts on energy, information technology and government procurement issues. In addition, she earned an MBA from the Wharton School. Pamela brings the skills, knowledge and network to support our clients’ international expansion goals.
International markets provide outstanding opportunities for U.S. exporters to diversify their customer base. Securitas provides risk mitigation strategies to help reduce the uncertainty associated with approaching new markets. Pamela will concentrate on solutions ranging from mitigating private sector credit risk, sovereign contract frustration risk, financing international trade, protecting equity investments against political risk, along with government relations strategies, to bring products to global markets.
Having previously lived and worked in France, Germany, Switzerland, and Brazil, Pamela has an extensive network of contacts around the world. She speaks Spanish, Portuguese, and French, along with English. While a State Department employee, she taught classes on diplomatic tradecraft, including how to evaluate sources of risk. In addition to her MBA, Pamela earned a Bachelor’s degree in Economics and Environmental Studies from Bowdoin College in Maine and a Master’s degree in International Affairs from the Johns Hopkins University, School of Advanced International Studies.
If financing is not part of your export strategy, you could be missing out on important sales or exposing your company to unnecessary risks.
Do not miss this opportunity to meet the region’s leading trade finance lenders and government finance representatives.
Receive the latest information on financing programs available with U.S. government backing from the Export – Import Bank of the United States and the Small Business Administration. You will also hear from companies like yours who have successfully utilized this financing to grow their international business. Who should attend?
CEOs, CFOs, and international marketing managers of export-ready companies
You will learn how to:
Utilize export credit insurance to protect against buyer non-payment, minimize risk, and offer extended credit terms to international buyers to increase sales;
Obtain working capital loans with U.S. government backing to provide capital for inventory, hiring, and performance bonds to support export sales orders and free up needed capital;
Offer financing at competitive rates to prospective customers to help close the sale;
Being claim ready starts with three things: Coverage, Compliance, and a Complete Claims Package. Let’s delve into each one.
One of the most critical aspects of trade credit insurance deals with having coverage on the legal entity with whom you are trading. As you know, legal entities are only responsible for their debt obligations and have their own distinct credit profile or credit worthiness. Underwriters of trade credit insurance approve coverage on a legal entity. If you, as the insured, sell to a different legal entity than the one you have coverage on, the underwriter has grounds to deny your claim. We recommend that before you begin any trading relationship, you request information that clarifies the legal entities to which you are selling. In some cases, there may be a holding company, parent company, or subsidiaries and it is critical you understand the legal relationships with each other. Legal entities may also us various fictitious names such as trade styles or Doing Business As (DBAs). Requesting a W9 on your trading partner often helps this process.
Trade credit insurance policies are “contracts of adhesion” which means that the insured has to adhere to the conditions of the policy. In other words, a valid claim must be in compliance with the wording of the policy. For a claim to be paid, It is imperative to be in compliance in these key areas: paying premiums, reporting requirements, filing claims by the relevant deadlines, and providing appropriate supporting documentation. This is covered in a Complete Claims Package.
Complete Claims Package
We recommend starting a file for each of your trading partners and keeping the file current with each shipment. What sorts of information you keep will depend on the details of your coverage, but in general, the following represent some of the items an insurance carrier will request with any notification of claim form: purchase orders, proof of delivery, invoices, and statements of account. These seemingly commonplace documents can often be challenging to gather once a buyer goes into default. One insurance carrier, The Export-Import Bank of the United States of America (Ex-Im), places great importance on having the exporter prove, through documentation, that the buyer received the goods. Ex-Im’s position protects them and ultimately the U.S. taxpayer against seller fraud. It also helps with the collection process since documentation is evidence that the buyer received the goods. Those currently insured with Ex-Im are strongly encouraged to review their policies. Many sellers are selling on Incoterms of Ex-Works (EXW) and bills of lading show goods being delivered to a U.S. location before being exported. In this scenario, Ex-Im will require further proof that goods were received by the buyer. Trying to ascertain this information when the buyer is financially distressed can be difficult.