Trade credit insurance is often a misunderstood insurance and credit management tool, especially by many professional credit managers. For a half century, I have been engaging businesses with an expressed interest in understanding “what is credit insurance”; one of the toughest critics in the room tends to be the credit manager.
I have often illustrated this point through an exchange during a prospect call many years ago. I had the pleasure of joining an agent of the old American Credit Indemnity Company during a visit to Cleveland, Ohio. The year was 1991, and the agent Ike Cotton was calling on a mid-level steel service center in the area. While this was an introductory call, the agent had been engaged with the company numerous times over the previous ten years. Ike was never able to get past Bob, the Credit Manager in his effort to discuss the value and benefits of trade credit insurance with the company’s CEO and CFO.
Ike leveraged my visit from Boston to set up the meeting which included the Credit Manager, his boss the CFO, as well as the Risk Director, the Sales Director and the CEO. For a company doing $300m+ of sales, I considered this to be the perfect audience.
Following the usual intros and niceties, Ike began to explain the fundamental benefits of carrying a credit insurance policy as well as ACI’s (Euler Hermes) capabilities. Bob immediately responded by explaining the company hadn’t experienced a significant bad debt loss during his tenure, much less a catastrophic one. When Ike ask him if the lack of any meaningful bad debt losses contributed to any impairment in top line performance, Bob indicated that he has never turned away a sale to a good company. The Sales Director expressed a different view, but Ike continued the general dialogue.
Agent Cotton asked about the business, its medium- and long-term strategies as well as its current challenges. He followed with many open-ended questions such as how credit was established in company? How many people did they have committed to acquiring information, cost of mercantile agency reports, chasing dollars, DSO targets, operating costs, outside collection agency costs, who handled legal matters and bankruptcy filings, etc.? He asked if the company ever conducted a cost analysis to determine the direct operational cost relating to their current credit management and risk management efforts? This would be beyond the costs associated with their bad debt reserves, actual bad debt write-off, external working capital cost, etc.
Ike sensed that Bob was getting more and more sensitive as the meeting progressed, very similar to the many conversations he had with him over the years. But he noticed that the CEO and CFO began to ask questions and discuss their business strategy. Ultimately, these discussions culminated when Bob indicated that his company didn’t need a business credit insurance policy because he was their insurance policy.
At this point, Ike decided to help Bob understandings by providing a historical perspective. To paraphrase: Ike explained; Bob, I have been an agent for my company for almost 44 years. During that time, I have met with hundreds of professional Credit Managers like yourself. Each one having been very successful, very knowledgeable and passionate about their profession. Many viewed a trade credit insurance policy as an unnecessary investment for the company as it duplicated their efforts and those of their credit department. Yet there is one simple fact that I can state after 44 years in this business- not a single Credit Manager ever lost their job recommending that their company make the investment in trade credit insurance. HOWEVER, I can name scores of former Credit Managers who lost their job because they recommended against it and the company subsequently absorbed a meaningful loss.
For the first time, Bob understood that Ike was NOT advocating eliminating his position, he was solidifying its importance and security. Credit management and risk management in a sector or economic period of significant uncertainty and volatility would enable him to expand his resources and improve performance. By doing so Bob would be able to manage cost better, improve his company’s DSO, reduce their reliance on the use of external capital to fund business, expand sales opportunities and reduce time and cost chasing deadbeat debtors or managing bankruptcy cases. Most importantly, Bob realized that he really couldn’t be the company’s insurance policy, he could only get fired should that unexpected catastrophic event occur.
Bob spent the rest of the meeting telling his colleagues how this tool, this investment, would help their company grow at the same time protect their capital, cash flow and earnings. Bob realized that trade credit insurance was a strategy that didn’t threaten his existence; it enhanced his job security and would help his company grow. He was all in.
Agent Ike Cotton retired in 1993, sadly he passed away in 2002. However, that policy remained in place until the company was acquired ten years later by a larger steel processing and service center. Bob remained a believer and advocate until his retirement years later. From that day forward, he would often recommend to his suppliers and customers, they should investigate the benefits and value of carrying a business credit insurance policy. His emphasis was always on the services trade credit insurance provided enhancing sales and profitability over the indemnification of a bad debt loss.
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