Speaker 1 00:00:03 Welcome to the trade securely podcast.
Speaker 2 00:00:06 When a business is looking for financing, there are a number of things. A bank must consider to determine their credit worthiness and having a receivables insurance policy can be very beneficial today on the trade securely podcast. We're going to look at the, a trade credit policy can provide to both the business and the banker in the financing scenario. I'm Janet Eastman. And today my guests are a ditches approved. He's managing director and team lead diversified industries at BMO corporate finance and John Middleton is the chair of react and the vice president complex risk trade credit international gentlemen, thanks very much for joining me today.
Speaker 3 00:00:44 Our pleasure, Janet.
Speaker 4 00:00:46 Thank you for having us.
Speaker 2 00:00:48 Oh, you're very welcome now. I Didia, I think it'd be great to have some, just a quick background on, on yourself to understand your background in banking,
Speaker 4 00:00:56 For sure. Uh, and again, uh, thanks a launch to, to you, Janet and John for having me, uh, on this podcast, really excited to be here. Uh, so I've been, I've been in banking for about 20 years now. Uh, you know, before Bemo, uh, I've been Bemo for about six years before that I was at a global bank. Uh, having worked in four different countries, you know, started in India, uh, went after the Philippines east and then finally came to Canada in 2011. Uh, so again, what I do for a living is I, I run a team of corporate finance bankers within BMO's, uh, you know, downtown Toronto office. And we work with mid-market companies across the GTA, uh, for their financing <affirmative> and other banking needs.
Speaker 2 00:01:45 Okay. So I don't know when you first came across receivables insurance, but given that you've working all over the worked all over the globe, I'm, I'm guessing that you've, you probably were aware of receivables insurance for a while.
Speaker 4 00:01:59 Uh, yes, I have. Uh, you know, uh, it, it's funny you say that because I think the applicant of receivable financing, uh, and insurance is a lot more outside north America and, you know, it's, it's, it's, it's great that it's catching up here in Canada and the us, but when you go to places like middle east and Asia Pacific, uh, which are very, very trade intensive countries, uh, you know, this is a very, very common proposition in those markets, so, yeah.
Speaker 2 00:02:29 Okay. So what is your impression, impression of receivables insurance of the policy, what it does and how it actually benefits clients?
Speaker 4 00:02:38 For sure. So I think the first thing that comes to my mind is, is really risk mitigation. That's, that's the word that comes to my mind, not just for the bank, but more importantly for our clients. Uh, again, in today's, uh, you know, uh, world economy where everything is really integrated, uh, you know, events in one corner of the world, you know, something like a, a Russia Ukraine has significant, uh, implications and ripple effects across every corner of the planet. Uh, and I think it's, it's, it's things like account receivable insurance, which really provide our clients, the Canadian exporters, uh, a piece of mind and a certainty of payment when they're shipping their goods, you know, services all over the world. Uh, I think the, the, the thing that sometimes gets missed by companies when they're thinking about accountable insurances is how expensive and time consuming litigation is.
Speaker 4 00:03:32 Uh, you know, when, when there's a nonpayment or a bankruptcy in those overseas markets that I spoke about the cost of recovery for those payments, uh, almost always outweighs the benefits and, and in those situations, again, having account receivable, insurance acts like a safety net, uh, really for the Canadian exporter that they should certainly be thinking about. I think the, the other thing that really is very interesting from my perspective as a banker, uh, on insurances, uh, when buyers both domestic and overseas are pushing the Canadian, uh, seller for longer dated payment terms, you know, 90 days, one 20 days, sometimes even 180 days, uh, in those cases, again, I, as anchor would always recommend to our client that they should think about insurance to safeguard from nonpayment. Again, a lot can change in 3, 4, 6 months as the past few months have shown the world has changed significantly in the last three months. So I think those are really my, my high, high level impressions about receivable insurance.
Speaker 2 00:04:44 Okay. And just one more question before we bring John in, I'm curious to know when you speak to your clients, are they aware of receivables insurance?
Speaker 4 00:04:54 I think they are the, the, the Canadian exporter community is very well educated and especially thanks to, you know, folks like John, who've done an incredible job of, of, you know, raising the flag and, and raising awareness. And so again, from our client perspective, I think there's a very, very high degree of comfort about the benefits and the applicability of the insurance proposition.
Speaker 2 00:05:17 Okay. Now, John, from your side from the IR side, um, do you have any additional questions or comments that you'd like to address to ADI you?
Speaker 3 00:05:26 Oh, well, I think IDI has, uh, made some really good comments there. And, uh, I just sort of wanted to, um, further elaborate on some of the things you mentioned, obviously the benefits of coverage. Uh, it does enhance financing, which is terrific. It, it allows the, um, the bank to lend more money against the insured receivable and many of our clients, uh, expand their sales and, uh, can offer longer terms when they use trade credit. So we see when they, when the clients come up for renewal, that their sales are growing year over year. And as we have clients for a long period of time, the trend is always upwards. So they are able to use the credit insurance, uh, to their advantage. I thought, uh, IOUs comments with regard to, uh, trying to cha you know, chase down, uh, delinquent buyers overseas, like some of the insurers that we work with, um, we are able to negotiate with the underwriter to, in, to enable our clients to, um, add the costs of, uh, trying to go legal onto the claim submission so we can get indemnification for not only the loss, but also any additional costs to try and collect, uh, with certain insurers.
Speaker 3 00:06:27 So I think that's something that, uh, companies aren't aware of, but there is advantages with certain insurers, uh, to be able to capture those costs also, which, uh, makes the product even more compelling. It's hard to quantify that kind of, uh, expense when you're, when you're transacting around the globe, but occasionally you're gonna have problems. And if you have an underwriter that's gonna indemnify those costs. I think that's, uh, really very, uh, advantageous. And I think the other thing that's important about the insurers that we deal with, because as a did mentioned, things can go bad very quickly. And we are, um, working with underwriters that are all rated a minus or better, and have an excellent track record of paying claims. So we do see a lot of claim payments. Uh, we track that information through O and, um, and other mechanisms. And, uh, certainly there is, um, a lot of claims being paid in the market for this particular product.
Speaker 2 00:07:17 Okay. So Aicia had said something earlier, which is actually surprised me that, you know, receivables are hanging out there for upwards of 180 days. What's the impact, John, on a client of yours when all of a sudden they're not getting payment for 180 days.
Speaker 3 00:07:35 Yeah. We, the beauty of trade credit is we can actually go out to 360 invoice terms and we do have clients that will go out that long. But as the Didia mentioned, um, you, you, it's hard to, uh, it's hard to manage a, a company's, um, and, and, and, and monitor their actual financial performance over a period of time like that. Like if you're offering 270 day terms or 180 day terms, um, where they may and today, and where they are at the point in time when the receivable is due to be paid, uh, there can be fluctuations. And so, uh, the there's definitely a, an advantage, the longer you offer terms, uh, the, the more advantage you have of, um, utilizing trade credit, and also, uh, being able to margin that receivable for, uh, at 90% using the trade credit for that period of time is also gonna be very beneficial from a, from a financing perspective. Uh, so that, I think also compels, uh, someone to think about trade credit insurance, uh, when they're talking to their financial institution.
Speaker 2 00:08:34 Right? So, um, you deal with ADI ya, and obviously he knows is about receivables insurance and has seen it around the world, but I'm curious to know, um, have you ever had to clarify on behalf of a client, John, just what receivables insurance is to a banker and what do you tell them?
Speaker 3 00:08:53 Um, well we just try, and when we're talking to the client about how they might be able to use the receivable insurance to enhance their bank relationship, we just talked to 'em about the ability to borrow more money against the insured receivable. And if we can use that to help our client grow, then everybody wins. The bank's able to lend more money, they're able to generate more income. Uh, the client's able to generate more gross profit by increased sales volume. And so, uh, we, we are really bene pushing the benefits of the product of trade credit insurance to help everybody and, um, and, and just be more successful overall. And often, uh, the incremental sales will offset will generate enough gross margin to help offset the cost of the insurance. So, um, in a sense, we almost have a situation where the insurance can pay for itself. Uh, and that's a kind of a really fruitful situation, especially if you're able to enhance your financing at the same time.
Speaker 2 00:09:45 Right. So generally speaking, and this is a question for both of you. So generally speaking, do commercial bankers understand the benefits of credit insurance for their clients, and yeah, I guess we can probably start with you.
Speaker 4 00:09:58 Yeah, I think, I think there is a, a fairly high level of understanding amongst the banking community in Canada, Janet, uh, and again, it just goes back to what John just said. I think, I think the key benefit for bankers a and the clients of course, is the, the ability for the banker to provide, uh, you know, 90%, uh, uh, you know, financing on insured receivables versus typically 75 for uninsured. I, I think the other thing that is a, a, a unique thing in the Canadian banking market is typically, uh, the chartered banks in Canada. Typically they don't margin, uh, uninsured, non north American receivables. That's a, that's a bit of a mouthful. I just said. So any receivable, any receivable that is originating in Asia Pacific or middle east, if it's not insured, typically the Canadian are reticent or at margining those, and again, obviously getting the insurance allows the banks and the clients to margin those things at at 90%. So I think, I think those two really, again, much in line with what John just said, uh, a bit earlier, uh, make, make the, the understanding of the proposition fairly high with the commercial banking community.
Speaker 2 00:11:20 Mm-hmm <affirmative> John, do you have any comments there?
Speaker 3 00:11:23 Um, I, I think that the, uh, growth of the product in the marketplace is, uh, partly reflected by the fact that the bankers are, um, picking up on the value of this product and understanding it. And certainly we've done lots of presentations over the years to the banking community, and, uh, there's always very enthusiastic reception to those presentations. Uh, people understand immediately what we're talking about, um, when we're, when we're with a group of bankers. And I think that they, they understand what we're, what what's available and, uh, and, uh, are thinking about how their clients might be able to leverage that to their advantage.
Speaker 2 00:11:56 Okay. Did you, what are some of the questions, um, that bankers often have about receivables insurance?
Speaker 4 00:12:03 Yeah, I think this, I think this is a really important question for this podcast. I think, I think the first question that typically comes up very even often from my colleagues and my, you know, team members would typically be around pricing. And how does that work? And, you know, what are the typical terms and policies? Uh, I think the, the other couple of questions which are really important, um, and would love to get John's views are, I think the first one that comes up quite often is how do insurance companies kind of approve credit limits on overseas buyers that aren't public companies. So they are their financials, aren't in the public domain, their private companies, you know, in China or in the middle east or in Asia Pacific. And, you know, uh, how do these insurance companies approve limits on them? And what's the process. And then second question that again, that, that, you know, um, comes up quite often, uh, also from our clients is under what circumstances typically do insurance companies not pay under an existing insurance policy that's in effect. I think, I think we'd love to get John's views on, on each of those, you know, four questions around, you know, pricing and terms and, you know, uh, credit limits and, uh, and, and UN, you know, under what circumstances do companies not pay.
Speaker 3 00:13:28 Yeah. Certainly happy to speak to those, those questions. Um, I think, uh, as it relates to the pricing, it's, it's, um, the, the underwriters are looking at, uh, sort of the risk profile based on the country risk. Um, the invoice terms of payment that are used by the client. So someone who's selling on net 30 day terms is going to be deemed a, a, a better risk than somebody who's selling on net 180 day terms. And that's gonna impact pricing. Uh, the countries are selling to the buyers with in those countries. Is there concentration risk risk with certain buyers in those countries? And how do those buyers rate, are they, um, investment rate style buyers, or do they have a lot of debt and perhaps, uh, look like a much higher risk, uh, rated buyer. So that's the kind of variables that the underwriters gonna take into consideration when they assess price and the price is, oh, we set as a percentage of the sales.
Speaker 3 00:14:18 So you have to ascertain what the insured sales volume is gonna be. And then a premium rate will be charged against that volume to, uh, determine the estimated premium, uh, for the contract period. Uh, the underwriters all have, uh, very sophisticated underwriting systems and maintain databases of buyers around the globe. And they tap into, um, credit reporting agencies around the globe, uh, that specialize in the markets where their clients are doing business in order to substantiate, um, and initiate, uh, buyer records for them to monitor the credit risk on those buyers, uh, when their exposure hits a certain threshold. And it's generally around half a million, uh, to, to, to a million, depending on the underwriter. And then we see that they, they require more information. And usually that is financial information in terms of financial statements. And so to your point about how do we access that information?
Speaker 3 00:15:06 That's the big challenge for the underwriters. Um, often we to approach the buyer and suggest to them that by sharing information under a nondisclosure agreement with the insurer, um, it will afford them the opportunity to obtain more credit. And it'll be essentially free credit to them because they'll be able to negotiate terms with, with their suppliers. So, uh, that that can benefit their business. And so is an incentive, uh, frequently for these people to, uh, share information back with the underwriters under non-disclosure agreement. So we have tremendous success that way in terms of helping the underwriters grow their databases and, uh, and generate more information to offer more credit in the marketplace. So that's a, a big benefit. And, and then I guess the, you know, I mentioned earlier that the underwriters are all aim minus are rated or better in the marketplace that we deal with.
Speaker 3 00:15:54 We, we have 10 licensed insurers in Canada that offer trade credit insurance. And so, um, you know, they do pay claims, but on occasion, claims are not paid. And so typically reasons that claims aren't paid is just because the client hasn't followed the policy parameters, and it's critical that these parameters are followed. So things like, um, you know, not having, uh, adequate purchase order or proof of delivery. Uh, so you can't show that proof of documentation, uh, to the underwriter and the event of claim that could be grounds to deny, uh, liability. Um, maybe the, the claim was filed outside the claim acceptance period. Uh, we see that sometimes clients are so anxious to try and collect that they, they forget that they've got, say 180 days from the invoice due date to get the claim in with the underwriter. Uh, they've gotta make sure that they get that in on time.
Speaker 3 00:16:43 And so we're constantly reminding clients about those claim filing deadlines to make sure that they get the information to the insurer on a timely basis. Uh, we've seen it in the past where there's been challenges. We're where companies think they're dealing with company X, but it could be company Y so often as an example in China, trying to make sure you identify the proper company that you're doing business with. That's really critical because if you've got a, a credit limit on the wrong buyer, and then the buyer does not pay, and you submit the claim to the underwriter and the underwriter's like, whoa, you've got the wrong buyer identified as the, uh, insured party here. That's, that's gonna create a problem for the underwriter in terms of paying a claim. So that's something that the, the onus is on the insured to make sure they know who they're doing business with.
Speaker 3 00:17:25 Um, so these are the types of things. You know, if, if you offer invoice terms that are longer than what is granted in the policy, that's a problem. So your policy has a, a cap of net 90 day invoice terms, and you've offered net one 20 days. Uh, you, you would have a problem if you filed a claim and showed that the invoices were stated with net one 20 day terms. So those are the types of things that happen, uh, where the underwriter, uh, has a reason to con consider declining a claim. Uh, obviously in those situations, uh, we're always trying to, to consider appeal processes, to try and make sure the underwriter indemnifies the client, uh, when errors are made. So I hope, I, I hope what answered on that.
Speaker 2 00:18:03 Did he cover everything for you? Did you?
Speaker 4 00:18:05 He did. No, that was fabulous. Yeah. Thank you.
Speaker 2 00:18:08 Yeah. I have a, a question here and it, it relates to some of the things that we've dealt with in the last six months, and I'm thinking of, um, the delays in shipping and what impact that, that has had on, um, some of your international clients, John, because there's been stuff sitting on ships waiting to go places. And I'm just wondering if you could give a brief overview of some of the impact. Todd,
Speaker 3 00:18:30 It's interesting that you should ask that question, Janet, cuz uh, we're seeing two things. Uh, the first thing is that, uh, the underwriters that we work with, um, some of them offer coverage from the moment you ship, whereas others, the coverage kicks in the moment the goods are delivered. So with the global supply chain challenges we have right now, if you're working with an underwriter where coverage is when the goods are delivered, um, you are opening yourself up to some exposure there because you can't control the timeline it takes. And that could give the, the buyer a reason to, to exit a transaction. So that's really problematic. We would obviously encourage people to consider using underwriters, uh, where the coverage is, uh, effective immediately as soon as they ship. Um, the second point, um, which is interesting, this is sort of a new trend we're seeing is some, some product is, uh, when the goods are being sold.
Speaker 3 00:19:19 If there's an indication that the, uh, product's gonna be delayed, being sold from the being, um, shipped from the port, we've seen situations now where the supplier is taken it on themselves to take the goods back and sell them somewhere else. And so our insured isn't even, isn't even able to deliver the product to the buyer. The, the supplier has taken it upon themselves to sell them somewhere else. And especially in this, in this period of rising commodity prices, they may be able to find better margins moving that product somewhere else. So if they haven't provided the, the final shipping documents to the customer, um, they may take it upon themselves to move good Salesforce. That's a real problem. Um, and, and that's, that's kind of aside the scope of trade credit because there's no true receivable with, with the insureds buyer because the kids were never delivered.
Speaker 2 00:20:08 Wow. <laugh>
Speaker 3 00:20:09 Yeah, it's crazy.
Speaker 2 00:20:11 Wow. Did you, you have any comments on that as well? Um, you know, the, the long shipping shipping issues we've had?
Speaker 4 00:20:18 No, I think, I think again, it's, it's great to hear, uh, John's perspective and you know, again, you know, this, this is, this is, this is, this is here to stay like these, these, these supply chain issues are not going away. Mm-hmm <affirmative>, which again goes to the importance of working with people like John, uh, and others in the community, uh, who, who live and breathe, trade finance and the risks around that and how we can, you know, mitigate through appropriate instruments. Right. So I think, I think that that's, that's, that's that's that's awesome. So thank, thanks. Uh, thanks for that, John.
Speaker 3 00:20:56 Yeah, no problem.
Speaker 2 00:20:57 So John, let's, let's just touch on how the broker does work with the insurance, uh, the insurers, et cetera, and, and that bridge that they, they can make between the insurer and the client.
Speaker 3 00:21:11 Yeah. I, I, I mean, the broker's role is really to try and help find the right solution for, for the client, uh, use us utilizing their access to the insurers in the marketplace. Right. And, and so we're, we're fortunate in our, industry's grown so much over the last, uh, 20 years. So because there's new entrance to the marketplace, there's new solutions, there's more capacity. And so it makes it easier for us to, to, uh, be able to find the right solution for our clients and, uh, place them with the appropriate underwriter so that, uh, they've got adequate coverage for the transactions that they're doing internationally and domestically. So, uh, you know, the there's definitely because of the additional choice in the marketplace, that's available to companies now, it really does make sense to utilize a broker and, and get access to the various solutions that are available. And then that let them map it out for you so that you can determine which, which solution is the best for your particular business. But, uh, certainly there's lots of choice out there. Mm-hmm
Speaker 2 00:22:07 <affirmative> receive as insurance is used by companies around the world to mitigate their risk. It being can be used to cover both domestic and international receivables. And for those companies doing business outside Canada, it's likely that your customer has a receivables insurance policy protecting their business. It's a trusted product worldwide. So if you're li interested in learning more about it, you can contact any one of our members that's listed on the react website and that's receivables insurance, canada.com. So I wanna thank you guys very much for taking time to have this discussion, uh, with us ADI it, your perspective was really very valuable, particularly because you have worked all over the globe as a banker. I, I really enjoyed hearing what you had to say,
Speaker 4 00:22:50 Pleasures, absolutely mine. And, and, and, and again, thanks to you and John for inviting me and, you know, uh, it's a, this is a great initiative and thank you for, for, for, for inviting
Speaker 2 00:23:01 You're very welcome. ADI Saru is the managing director in team lead diversified industries at BMO corporate finance, and as always, uh, John Middleton. Thank you you for your expertise. John's the chair of Rak and vice president complex risk at trade credit. So thank you, John.
Speaker 3 00:23:16 Thanks, Janet. Appreciate, uh, the opportunity today and thanks to Didia for joining us.
Speaker 2 00:23:20 Yeah, this was, this has, uh, been a very, uh, informative podcast. So thank you guys. The receivables insurance association of Canada is a member supported organization of Canadians helping Canadian. Mrs. Grow. You can follow us on LinkedIn and Twitter, and please share this podcast. I'm Janet Eastman. Thanks for listening.