Episode Transcript
Speaker 0 00:03 Welcome to the trade securely podcast. Welcome to the trade securely podcast, a show where we help Canadian businesses grow safely and securely at home and abroad and it's brought to you by the receivables, insurance assistance
Speaker 1 00:18 creation of Canada. I'm your host, Janet Eastman. This week on the show we're going to talk about the fine balancing act of credit management for business with two people in the industry. Abraham Catan is a trade credit practice leader at a on risk solutions with over 30 years of experience in credit management collections, alternative dispute resolution, negotiations and litigation process. His colleague David Cook is a broker and an account executive at Aon risk solutions credit solutions, whose primary role is to develop credit solutions that addressed trade risk. So together they have a wealth of experience that's going to help us navigate the credit management process. So I think David, let's start with you actually. Welcome gentlemen.
Speaker 2 01:02 Thank you. Thank you.
Speaker 1 01:04 So David, let's start with you and, and let's talk about, do most Canadian businesses actually have a credit manager?
Speaker 2 01:12 It actually really depends on the business. While some companies might not have a dedicated person for the credit function, it is often performed by person operating in multiple capacities. As a volume of incoming credit re class increases or concentration of credit risk becomes more evident. Most companies will want to have it designated professional managing this business function.
Speaker 1 01:33 So initially though, would it be somebody like the CFO who's looking at that,
Speaker 2 01:38 that that might be correct. It could also be a president depending on the size of the organization.
Speaker 1 01:42 Right. Okay. So Abraham, you've been a credit manager. What is the primary role of a credit manager?
Speaker 2 01:49 Well, the primary role of a credit manager is really to assist a company to maximize their sales and mitigating potential losses. Some of the, um, responsibilities they are, uh, they have is to oversee the entire credit granting process, apply and institutes sound credit policy, initiate credit reviews on existing customers, and it's up to credit worthiness of, uh, future customers.
Speaker 1 02:15 Okay. So what would you say is the most challenging area of credit management for the credit managers then?
Speaker 2 02:22 So I guess the most challenging area for a credit manager would be to ensure that the credit collection policies not too restrictive and if it's still Tate sales and growth, right. A, the second area that can be extremely challenging for a credit manager is to consider a customer from both a sales perspective and also a risk perspective. So they're not choking their sales and finding solutions that will maximize sales and mitigate potential risks to a company.
Speaker 1 02:47 So where do they actually find this information? Like how do they access that information?
Speaker 2 02:53 Well, they can access information through Dunham, Bradstreet, they can, uh, various credit reports and tools. There's a data analytics, there's a lot of proprietary information. Um, some companies also use, um, you know, various internal systems, right, to access different types of information and credit worthiness of a client.
Speaker 1 03:17 But it, it can be a fairly arduous process then I would imagine, especially if some of that information is hard to find. Correct. Yeah. Okay. So Abraham, it's been 10 years since the last recession and the credit crunch. What lessons have you learned? What did you learn then and what are you learning as time goes on?
Speaker 2 03:38 I guess the, uh, the main lesson learned is expect the unexpected and exploring, sharing your accounts receivable with a credit insurance policy. You know, there's a lot, uh, as you noted before, there's a lot of traditional tools available to credit managers to assess risk such as, you know, credit scoring, credit reports, bank reports, taking security and verifying credit references. However, none of these provide a hundred percent guaranteed that your company's going to get paid. And just one large unexpected bankruptcy can have a devastating effect on the supply chain and various industry sectors leaving your company. Oh, and customers with the inability to pay you.
Speaker 1 04:15 Yeah. Okay. So <inaudible> David, let's look at what the differences between a credit solution and then a trade credit insurance policy.
Speaker 2 04:23 Absolutely. I think it's a great question. In the context of coverage options, most businesses consider a trade credit insurance policy to protect themselves against the risk of nonpayment. The purchase decision is typically singularly focused and self-serving for the insured. A credit solution involves a risk analysis for all parties included in the transaction and the application of a variety of risk mitigation tools including trade, credit, insurance, surety and financial products that might be used to drive a desired result. It includes a comprehensive 360 degree review of the trade transaction by industry experts across multiple lines of coverages and a combination of risk mitigation tools manipulated towards offloading trade risks for the financier's suppliers and counter parties by providing integrated credit solutions that involve all parties of the transaction. We bridge the inherent risks for each and better facilitate commercial trade.
Speaker 1 05:18 So from your experience, David, how many Canadian companies actually are mitigating their risk and protecting themselves in this way?
Speaker 2 05:27 Um, in terms of what, in terms of trade credit or exploring a credit solution on having maybe, uh, like a surety solution in place on one side of the transaction may be a trade credit insurance policy on the other side of the transaction. Is it, is that what you're referring to? We've had multiple inquiries. Um, and the reality is, is trade credit insurance acts that are acts as an excess coverage solution to any other form of indemnity in most cases. The other element to trade credit insurance is it typically doesn't cover a contract rejection or performance risks. So it, although it doesn't act like surety for maybe obligating the transaction, it can also provide some additional peace of mind. And you might also have instances too where surety might be at capacity on issuing bonds for principal, uh, throughout the transaction. And that's where we typically might see an inquiry come up and certainly that information would be disclosed as well to the insurer that we're working with.
Speaker 1 06:33 Right. Okay. So Abraham, from your, from your perspective, what are some of the benefits and you've actually been a trade credit manager or a credit manager rather. So from your perspective, what are some of the benefits of purchasing a trade credit insurance policy?
Speaker 2 06:51 Well, I guess one of the biggest benefits that's if I was buying it is peace of mind. Knowing that your, you know, your, your receivables are secured, it provides you protection against insolvency and a customer default on sales meet on credit terms. It also helps to facilitate growth and improve bank margining on you and you and existing a market, uh, to help support your company's accounts with you. Will policies and validates, found credit protocols. Right? Yeah. And other thing that I think it's quite important especially these days is it offers a solution for directors and officers by providing them a second opinion, uh, on credit limit decisions and monitoring the customer portfolio. This way you're not leaving, you know, uh, large concentration risks or you know, very large decisions with one person being the credit manager. You're getting a second eyes taking a look at that portfolio and giving it its blessing. You have an endorsed credit limit
Speaker 1 07:45 right now. I mean, we've seen some colossal bankruptcies over the last little while. Sears is one that that definitely comes to mind. I mean, there, there are a lot of businesses that most people thought could never fail. So, um, in the past have, you know, I mean, Canadian companies have continued to do business with some of these, these, um, businesses because they just thought they're too big to fail. And are they going and, or are they protected when they do do that business? I'm just trying to get a sense of, of how Canadian companies are actually using receivables insurance.
Speaker 2 08:21 So they're there, they're using it to, um, you know, to improve their bank, margining, their, you know, facilitate sales growth. Typically, if you don't have a trade credit insurance policy, you're leaving, you know, uh, you, you're, you're leaving a, your company, uh, potentially exposed because, um, I do, you know, explained a lot of the times you're not aware of unexpected, you know, potential catastrophe kinda throw up the cloth. Right? And we've seen many of them. Um,
Speaker 2 08:50 if you can get a credit limit in place, then what happens is, uh, you were sitting in the driver's seat, you know, uh, instead of your customer sitting in the driver's seat and, and, and I'll explain to you from a credit manager's perspective. So, typically if you have a very large client, you've always had a good relationship with the client and the client, you know, it was a little bit late, you'd most likely ship the product out. And, um, if you didn't receive by the second or third, you know, a week, but you're past two, most likely you would put the account on hold. You could get a potential call saying, look, you know, we're having a little bit of an issue. Somebody didn't pay us, please just approve it. Right? Um, if you take the heart's dancing, I'm not going to ship you the next thing, the situation or the next call did.
Speaker 2 09:32 You may be getting it unless you shipped me, I can't make any money to pay you. Great. And now you're sitting behind, you know, behind other creditors and you're sitting at the mercy of somebody who's already got your product. And in most cases, as soon as the product has left that building, you're done. So if you have a receivable insurance, you can, you know, there's certain timelines and protocols that, uh, you know, that can be enacted. And at the end of the day, you don't need to continue shipping, right? You can run your business the way you need to run your business and not at the mercy of your creditor who you know by chance or button, not by chance, you know, doesn't have the ability to pay you.
Speaker 1 10:11 Right. And I guess your insurance provider would also have that visibility that they would be able to say, look at, there is trouble coming down the line here. Keep an eye on this client.
Speaker 2 10:22 Correct. And and insurance providers, many of them have proprietary database and they're looking at the buyers buyer, right? So, um, there's a lot of great value with a credit report. You know, dun and Bradstreet Equifact trends units, these are all, you know, great reports. These are a snapshot in time. You know, where an insurance carrier is looking at it. These buyers on an ongoing basis. So if they've had a claim or if they've had some collection problems, then they are advising their clients that just potential, you know, the trouble coming down the line. So if there's a train coming, you want to get out of the way in many times if, if you're not out of the way you're going to get hit. This is why many, many companies have gotten hit unexpectedly, you know, on some very large receivables that you know, prior, you know, prior they had no, no indication that these receivables have gone bad if they've always been good, good paying clients.
Speaker 1 11:20 Yeah. But bad things can happen to good companies, right? Yeah. Yeah. Okay. So David, um, how have tariffs heightened the demand for free trade credit coverage?
Speaker 2 11:32 Yeah, it's from a Canadian import perspective, terrorists or the threats of terrorist by China and us businesses has pressured Canadian companies to consider pricing implications throughout the supply chain. Trade pacts such as the U S MCA or formerly known as NAFTA, have resolved and, and heavy reliance on us suppliers with the cost of terrorist and posed on the U S suppliers likely to be passed along to Canadian importers, many Canadian importers and now looking to Chinese suppliers as the threat of terrorists of U S suppliers begins to materialize. Challenges include 30 to 50% deposit made the Chinese supplier often with little knowledge of the country business climate or suppliers, credit worthiness, trade credit insurance with the posit or advanced payment coverage is a useful tool that can help alleviate concerns surrounding this risk. Similarly, this shift could result in an opportunity for Canadian exporters' should us counter parties elect to import from Canadian suppliers under the rules of the U S MCA.
Speaker 1 12:35 Okay. Okay, so let's talk about that role that that data analytics is going to play to determine the trade credit risk. Um, how does that work?
Speaker 2 12:44 Sure. What perspective analytics and maybe just to clarify that being the data that we collect to helping our clients make informed decisions. That data incorporates carrier performance as reported to the office of the superintendent of financial institutions or by annual report. This information is database and used to draw insight with respect to the relationship between premium written growth and increases in claims volume and frequency. The information is further aggregated to draw insight on the trade credit insurance industry in Canada and identify trends. Secondly, historical industry and sector loss information is also incorporated into our analytics. Thirdly, carrier performance surveys conducted globally to measure the response and lift of each insuring key service areas is also collected by on and lastly inclined satisfaction surveys to ensure that our clients are satisfied. You see these analytics can be helpful to clients when trying to determine the state of the market industry lost trends, the usefulness of non-cannabis limits versus cancel limits and expected service levels of each carrier.
Speaker 1 13:51 Okay. So I guess we're almost out of time here, but I guess the one thing, and I remember somebody saying this to me about insurance in the past, and when you're thinking about, um, receivables, insurance, it's no good calling up the insurer when your house is on fire to buy fire insurance. So it's no good when things start to go badly wrong to actually call up and get your coverage. So even in good times and bad times, people should be investigating the power of receivables insurance, is that correct?
Speaker 2 14:23 Okay. Right. I mean, I would agree with that. And I, you know, further to the previous question since the last financial crisis, I think it's important to note that during the last financial crisis, it was very difficult to underwrite trade credit risk because of the bankruptcies and losses did go so high. The important element to that though was, is if you were a client before the financial crisis hit, majority of the insurance carriers did what they can or could in order to support their existing client base. Whereas if you didn't have trade credit insurance and then the financial crisis did hit and everyone gravitated towards crate trade credit insurance, at that point in time, most underwriters were just simply trying to support their client base rather taking on additional risk. So the point of my comment is certainly like, you know, and to into your comment, Janet, it certainly does make sense to investigate trade credit before you have a financial crisis, whether that be a, from an economic standpoint or even a micro economic standpoint within your own business, simply because most carriers are there to support their clients when a crisis does occur.
Speaker 2 15:33 Uh, and they, and they tend to be a little more restrictive on taking on new risks, uh, in the middle of a financial crisis.
Speaker 1 15:40 Right. And I guess, um, ultimately, uh, from your standpoint, Abraham business is always evolving. So, um, whether it's good or bad, you know, you just, you just should be making sure you've got your, your assets covered.
Speaker 2 15:55 That's correct. You don't want to have any unexpected surprises. It takes a long time to build up, you know, uh, you know, a company and to be sure that you know, you're going to get paid, you know, the last thing you need is an unexpected, you know, the surprise, the a of a loss that you should have seen coming.
Speaker 1 16:12 Yeah. And that could, uh, you know, derail your business completely. Gentlemen, thank you very much for taking the time to, I look at credit management for business. I really appreciate your insights. Um, right there on the front line. You both are. So that's great. Thank you.
Speaker 2 16:27 Thank you. Thank you.
Speaker 1 16:29 Abraham Catan is the trade credit practice leader at Aon risk solutions and David Cook is a broker and an account executive. At Ayaan risks, solutions, credit solutions. The trade security podcast is brought to you by the receivables insurance association of Canada. We're helping Canadian businesses grow safely and securely at home and abroad. So please share the podcast with your business network. I'm Janet Eastman. Thanks very much for listening.
Speaker 3 16:51 The trade security podcast is brought to you by the receivables insurance association of Canada, who's member companies help Canadian businesses succeed and grow securely.
