Improving a company's odds in relation to trade credit risks

By Kirk Cheesman

On Tuesday November 1, 2011, the race that stops a nation, the 151st Melbourne Cup, will take place in Australia. Once again, millions of dollars will be placed on the race with many punters making their selections based solely on the horses name, the jockey's colours, or the country of origin of the horse. And... sometimes this selection criteria actually works!
 
However most gamblers will take into consideration a horse's past form and performance, the weather conditions, the trainer's or jockey's history to make their selections that day.

In credit management, some businesses take a "punt" on a client by way of simply acknowledging the client is in business and wishes to make a sale. However, history shows a more savvy business can considerably improve its odds of selecting good risks over poor risks.

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Stress Testing Your Company’s Balance Sheet

By Ron Doyle

In recent months European banks have been subjected to stress testing. The purpose of the testing is to determine if a bank’s capital can withstand a loss from a catastrophic event that is improbable, but possible, and will impair assets. It is surprising to realize that a relatively small impairment of assets can wipe out the capital of even banks that appear to be very solid.

What happens when a company applies a similar stress test to its balance sheet? In assessing the balance sheet of a company some areas to consider are:

• What percentage of total assets is represented by Accounts Receivable?
• What are the largest exposures to trade credit risk?
• How strong are the accounts with the large exposures?
• Could the company absorb the loss of one of these accounts? (remember: improbable, but possible)
• In Non-Current Assets section, what would be the impact if assets, such as mobile equipment, fixed investments in plant and equipment and even goodwill, had to be shown as impaired due to a political event outside of the control of the company?

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The Perfect Storm! Be Prepared for the trade credit risks your business may be facing soon

By Ron Doyle

My last blog post asked whether you were losing any sleep over the debt crises in Europe and the USA. I then went on to suggest that perhaps you should be worried due to four factors:

1. The impact of sovereign debt on bank liquidity
2. The deepening debt crisis in the USA
3. The cuts to government spending in Europe and North America
4. European countries possibly having to leave the Euro and revert to old currencies

The likelihood of the events listed above all occurring together would have been fairly improbable a year ago, but now the level of probability has increased significantly as government leaders appear to be incapable of coming up with solutions.

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The New Normal in Trade Credit Insurance Claims

Submitted by ICBA Asia, Brazil, India and the USA via the IRC Read & Delete Monthly

As the third anniversary of the global financial meltdown that brought down Lehman Brothers, Shearson, Fannie Mae and Freddie Mac approaches, it’s a good time to take a look at an ICBA brokerage’s claims history and claims as found today. The bad news is that a record-breaking number and record-breaking dollar volume of credit insurance claims were filed in the U.S. since the Fall of 2008. The good news for ICBA clients is that insurers paid claims across the board.

As the global economy continues on its rocky road toward recovery, claims activity in the U.S. is slowing down, but is still at a level – depending on the measure – three to six times as intense as the pre-crisis mean.

It is fair to say that credit insurance programs are predicated on sound credit management skills.  The credit practices and collection capabilities that make companies attractive to the credit insurance industry in the first place, also stand clients in good stead as first and second lines of defense when the "cat gets among the pigeons" and the economy goes into a tailspin, as happened for two years after September 2008. Insurance coverage was there to be used in the worst-case scenarios.

Good credit managers need to continue their close scrutiny of buyers and diligent collection efforts going forward. In this post-crisis age, there is still no better formula for the management of a credit department or credit insurance policy than to know your buyer, know your lender, demand financials, and maintain detailed, accurate files.

Credit insurers are good and fair partners at time of claim. That is, claim denials are not based on subtle complexities of the credit insurance contract. The Top Five Reasons for Claim Denial below likely capture about 80% of the reasons for serious problems at time of claim or claim denials.

Top Five Reasons for Claim Denial

• Late claim filing
• Unpaid premium or unreported shipments
• Unauthorized rescheduling of original terms of sale
• Shipment into financial difficulty (example: to a buyer +90 days past due)
• Required claim filing documents missing or incomplete

For more ways to minimize loss, get in touch with your local ICBA broker.

(ICBA Asia, Brazil, India and the USA is also known as International Risk Consultants, Inc. (IRC), and has agreed to continue to share these posts with the ICBA blog.)  

Losing Sleep Over the Sovereign Debt Situations in Europe and the USA?

By Ron Doyle

Are trade credit risk concerns keeping you awake? Are you feeling the stress from the sovereign debt situations around the globe? Well… you should be! 

Below are four ways in which debt crises can impact the creditworthiness of commercial buyers:

1. Bank liquidity is critical to the normal operational financing of companies. If bank liquidity tightens, the availability of financing becomes more restrictive, and if it is available, it becomes more expensive. In Europe the level of unsecured interbank lending has basically ground to a halt, according to David Oakley, correspondent for Capital Markets, in his July 3, 2011 FT.com article. 

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