Any risk-management program that helps your clients protect the assets they pledge to you is prudent. There is more than just the coverage the policy provides, however. Credit insurance can provide you with protection so you are able to enhance borrowing arrangements by increasing the percentage you will advance against insured accounts, and allowing more accounts into the borrowing base, for example, large concentrations, slower paying customers, and export customers.
Credit insurance lowers risk for equipment manufacturers and its bank. By Victor Sandy
In a competitive environment, or in situations where you are simply searching for ways to meet your client’s increasing funding requirements, the goal is to safely put more capital in your client’s hands. As you look for new ways to maximize working capital availability, consider the multipurpose financial tool known as accounts receivable insurance.
Clients can expand their working capital by better leveraging the same base of assets with the use of credit insurance to support a receivables-based borrowing arrangement. Credit insurance programs can be written to match your target advance rates and indemnify a client or its lender beneficiary. You may find you can be more liberal in setting your advance rates and lend more against your clients’ accounts receivable portfolio without increasing your overall exposure. Consider the following borrowing enhancement scenario.
Client: Emission-testing equipment manufacturer.
Situation: Medium-sized company experiences tremendous growth opportunities, especially from international markets. Growth was being internally funded and was beginning to limit the company’s opportunities.
Operating Facts: Annual sales, $20 million (50 percent from export sales); average accounts receivable, $3 million; gross margin, 40 percent; account turns per year, seven; credit function handled by the corporate controller.
Objective: Credit risk was not an issue. The prospect was interested in leveraging assets within a borrowing arrangement, freeing up capital so the manufacturer could maximize all selling opportunities, both domestic and international.
Solution: Implement a domestic and export credit insurance program that eliminated all credit risk for both the prospect and the lender.
Results: Credit insurance transformed pledged accounts receivable into “riskless” assets for the lender, allowing an increase in advance rates, the inclusion of prior excluded receivables in the formula, and also the ability to borrow against export open credit invoices. In total, both programs were projected to free up approximately $1 million in additional capital for the client.
Additional Capital
Average receivables ……………….$3 million
Allowed receivables….……………..$1.2 million
Prior advance rate .………………….80 percent
(domestic sales only)
Available capital……….……………..$960,000
Newly allowed receivables………..$2.5 million
New domestic advance rate.……90 percent
Export advance rate ……………….70 percent
Newly available capital………………..$2 million
Cost-Benefit Analysis
Additional capital provided………$1.04 million
Funds employed back
into business at………………………….40 percent gross margin
Additional opportunity………………$416,000
Times account turns per year……7
Potential incremental return……..$2.9 million
The total cost of credit insurance programs: is $50,000.
The majority of policies today include past-due default coverage in addition to protection against insolvency losses. Carriers will typically provide clients with more time to work with the customer before filing a claim. Given the protracted default coverage, you can extend the eligible receivables window to include slow-paying accounts that are found to be good-quality credit risks. In cases where clients have exposure to one or a few key customers, concentration caps can limit the lender’s exposure to these accounts. To allow the client access to the full potential available on the total account exposure, you can ensure the accounts for the needed credit limits and remove the caps.
Typically, lenders exclude export receivables from the borrowing base even though more and more companies are beginning to expand overseas. Export credit insurance allows you to safely include these accounts in the borrowing base, freeing up extra working capital for the client.
Credit insurance works as a great financial tool for both lenders and their clients. This unique coverage accommodates specific coverage needs such as the issues mentioned above while providing clients with credit-decision support and risk-management expertise to strengthen the credit practice. As we know,
the lenders that can put the most money on the table typically win the deal. Using credit insurance, you can more safely and confidently grow your portfolio. BN
Victor Sandy is executive President/CEO at Global Commercial Credit, a specialty broker of domestic and export credit insurance, headquartered in Bingham Farms, Mich.
Contact him at vsandy@gccrisk.com.
