The world is not against you, it is just busy – six trade credit insurance strategies for trying times
Friday, February 13, 2009 at 10:45PM By Rob Downey
Credit insurance is a basic industry. Whenever someone in trade finance uses "creative" in the same sentence as "credit insurance", I check my wallet to see that it is still there. Still, for business leaders who intend to overcome the harsh odds of failure in stormy economic conditions, strategic thinking begins not so much with creativity as with the notion that their company is a unique anecdote afloat in an ocean of volatile statistics and adverse weather probabilities.
Credit insurance can be thought of as a set of strategic tools to be used in various combinations to address purchasing, marketing, sales, client management, cash management, and risk mitigation concerns. Great companies have long regarded credit insurance in this way, i.e., as a multi-dimensional tool kit. And, as noted in preceding posts on this blog, credit insurance prices escalated significantly after the middle of 2008. So, if you are going to pay for it in 2009, you may as well consider the widest possible variety of applications that the tools may have for your company’s situation. Here are six strategic trade credit insurance applications:
Purchasing– Take control of your own creditworthiness in the market by obtaining an insured limit on your own company. Key vendors can then be approached to offer your firm less restrictive terms of sale.
Sales– Easing terms for your customers seems counter-intuitive at this moment. But, if non-payment protection is in place to spread the risk, you can enhance your status as a vendor by removing from your customers the need to tie uptheircash with advance payments ortheirbank lines with Letters of Credit.
Marketing– If credit exposure in a troubled country or region can be insured, then the region or country is susceptible to your marketing efforts. Follow the willingness of insurers to underwrite a given deal, term or country. "Follow the capacity," is a guideline for the wise leader when assessing near-term marketing possibilities. A project or buyer in an economic or political situation entailing otherwise unacceptable risk may be readily considerable, if the project or buyer becomes insurable against government interference, embargo, hard currency cut-off, or commercial non-payment risk.
Client Management– Your largest client may think they run your company. At times you may agree. Even if a large customer is not presently in financial difficulty – but certainly if they are – one-off coverage may be sought to allow you to control the excessive concentration of risk related to your exposure with them.
Cash Management– Uninsured foreign receivables are usually excluded from a borrowing base, but even domestic receivables, included in collateral at lower than optimal advance rates, can be insured in order to be more useful in support of short-term funding needs.
Risk Management– Receivables are typically the largest uninsured asset a company has on its books. Deductible levels, coverage percentages and pricing can be used to fit most risk-sharing tolerances.
Extreme caution is not always the best bet in unknown circumstances. If your product mix and strategic ideas float in 2009, it does not matter how deep the implacable ocean beneath them may be. Indeed, to a good crew in a sound ship, deep water is better than shallow in stormy weather. When, as now, we find ourselves far from any known safe harbors, it is better to head boldly out into the sea of opportunity than to navigate too closely to the leeward shore of old, treacherous and rocky habits.
As in the old song, "love is only for the lucky and the strong", stay strong and good luck this Valentine's Day!
(Rob Downey is one of the founding partners of International Risk Consultants, Inc. (IRC) www.irc-group.com – a globally-integrated trade-finance and credit insurance specialty brokerage, which serves as the operating member of ICBA for Mexico, Brazil, India, China and the U.S.)