Global
Commercial Credit, of Bingham Farms,
Leads in Domestic, Export Consulting
Reprinted
with permission from Michigan Banker - November 1997
By Jerome
O'Neill
BINGHAM FARMS
- With offices in Detroit and Chicago, Global Commercial
Credit Co. is fast becoming a force in the Midwest in
terms of providing domestic and export credit insurance
and political risk insurance for companies who sell to
commercial accounts on so-called "open credit"
terms.
The firm's
clients use credit insurance programs to eliminated the
risk of unexpected customer default, improve their receivables-based
borrowing arrangements, expand open credit sales, and
start up export sales.
"While
credit insurance is widely used in Europe, and has been
in use in the U.S. for a century or more, many domestic
companies still are unaware of the unique benefits this
financial tool can offer their business operations,"
said Victor Sandy, a VP with Global Commercial Credit.
Steven Zack,
Global Commercial's president, explains how his firm assists
its clients:
"While
competitive pressure and market opportunities force extension
of aggressive open credit terms, many companies are not
in a position to absorb the potential losses that could
occur as a result," he said. "This dictates
that one of two scenarios occur. Either the company passes
on the sales opportunity or forces restricted terms that
limit the customer's ability to buy, or they take the
risk and face a major threat to earnings and possibly
their survival.
As an example,
a company with a small group of accounts representing
80% of sales may face potential defaults well into the
six or seven figure range. Let's assume a loss of $200,000
occurs. At a 20% gross margin, an additional $1 million
sales would be needed to make up for the lost bottom-line
revenue. In other terms, after a loss of this magnitude
occurs, the next $1 million in sales is made at zero profit.
If margins
are lower, the impact is even more dramatic. Even though
most large account exposures are with companies considered
to be 'good as gold,' should an unexpected loss occur,
the impact on the company would be devastating. Most companies
make wise credit decisions based on information and credit
expertise; however, many unpredictable events can occur
after the decision is made and it is too late to reduce
the exposure," Zack said.
"While
letters of credit and personal guarantees are most often
used, there is a financial tool available that can be
used to transfer the risk of customer defaults on both
domestic and export receivables, thus eliminating the
threat of a catastrophic credit loss. Accounts receivable
insurance is a custom-tailored product offered by several
domestic carriers, and available through specialized brokers.
These programs are designed to wrap around a company's
existing credit practice to provide an extra layer of
protection in the event of a loss," he continued.
"At a
typical cost of 1/10 to 3/10% of covered annual sales,
credit insurance has little measurable impact on profits
and can assure long-term financial stability and security
in spite of changes in the economy or business cycle,"
Zack said. "Whatever the approach, it is more and
more critical for today's managers to be conscious of
credit risk, and the tremendous impact losses could have
on their business, and put safeguards in place that will
reduce or eliminate losses."
Benefits
to Lenders
From a lender's perspective,
a properly structured credit insurance program provides
several benefits. In addition to eliminating the risk
of a large unexpected credit loss, the program provides
expert credit decision support to further strengthen the
borrower's credit practice. The borrower's accounts are
underwritten at the coverage limits requested, allowing
an expert industry analyst at the carrier to review and
render a decision on the accounts. Once coverage has been
approved and an account is insured on the policy, the
carrier maintains the due diligence and on-going monitoring.
Should an account deteriorate to the point of imminent
default, the carrier can provide advance warning that
may help the lender and borrower avoid a loss before it
occurs.
By eliminating the risk
of loss on pledged receivables, it is possible to provide
higher advance rates at less risk, and possibly include
more receivables in the borrowing base. The end result
is greater working capital availability for the client,
and a larger, safer loan for the lender. Often, just a
small increase in the advance rate can result in significant
additional working capital as the client turns their receivables
and the increased advance "recycles" itself
at each turn. This approach can give the lender a distinct
competitive advantage by enabling them to offer more to
the client. Further, with such a low incremental cost,
the credit insurance program does not have a measurable
impact on the fee structure of the borrowing arrangement,
while offering a significant advantage.
For smaller, less sophisticated
clients, the policy can actually function as an outsourced
credit department, and go as far as prescreening potential
customers for insurability before a sale is made. With
more and more demands being placed on commercial lenders,
there is often not enough time to properly monitor a borrower's
aging each month. Having a credit insurance program in
place can eliminate the window of opportunity for undetected
problems to occur.
A Means to
Transfer Risk
A credit insurance policy
also provides a means to transfer risk, when high concentrations
are present. Since the 80/20 rule has proven to be true
in a majority of companies, credit insurance represents
a great approach to hedging large exposures, and more
fully leveraging the receivables to give the borrower
access to more working capital.
As a financial consideration,
credit insurance can help the lender structure advances
on non-traditional receivables like export accounts, and
work-in-process or purchase orders. While historically,
it has been difficult to advance against these exposures,
by eliminating the risk of the debtor's default, many
lenders are now finding a great degree of comfort in these
receivables. With credit and collectibility issues eliminated,
the borrower can pledge what amounts to a riskless asset.
In addition to Zack and
Sandy, other top officers of Global Commercial Credit
include Thomas Purther, CEO; Scott Jacobson, board chairman;
Craig Bonnell, vice president; and Chris Blain, treasurer.
