Episode Transcript
[00:00:00] Speaker A: Granting credit is not an easy decision, and it can be risky. I'm Janet Eastman, and on this episode of the trade securely podcast, I'm joined by two experts who've been credit managers and now work with companies to help them mitigate their credit risk. Michelle Davy is president of credit ashore. Mark hall is vice president of elevate global insurance, and they're both members of the Receivables Insurance association of Canada. And we're going to address how to avoid the pitfalls when granting credit.
Thanks to you both for participating in this, because I am sure you are going to be able to share some really great insights in how to avoid the pitfalls when granting credit based on your experiences in both roles. What we want to do here is address six key questions, and we'll put those up on the screen so people can see them. But the very first question that we're going to address is this one, and it's why is it important to have a completed credit application from each customer?
[00:01:08] Speaker B: So having a completed credit application is really important because it a gives you the correct legal name and address of the customer that you're dealing with. A lot of times you may be thinking them, thinking the name is something, you know, Joe Blow sort of thing, but really it's a numbered company based in out of a province or Canada for that matter. So having it the correct legal name, if you ever had to sue them or register a lien against them or anything like that, is very, very important.
[00:01:50] Speaker A: We also wanted to talk about three trade references and the bank that's going to help you. Let's address that, explain what this all means.
[00:02:00] Speaker B: So you want to find who your prospective customer is currently dealing with. And hopefully they're providing you with three names of companies that are their largest suppliers. And you go to those suppliers and you ask them for a reference, how long they've been dealing with them, what their current credit limit is, what the current balance is, and if anything is overdue. And in a good case, you'll find that the information coming back to you supports a certain volume of business. And in a bad case, if they give you a reference where they're currently on credit hold, that also provides you with some information that you can deal with.
And potentially it's because they're on credit hold with somebody else that they're now coming to you.
[00:03:04] Speaker C: Mark, would you say that most often what we're going to get is the three best references, right?
[00:03:10] Speaker B: Yes, and it depends on when you're actually asking for the information. So the first time you process it, you might be getting good references, but if you went back again in six months, it might be a different story. And processing trade references and bank references, at least on an annual basis, if not even quicker these days, is so very important to granting good credit out there.
[00:03:45] Speaker A: So I'm going to ask Michelle this, but how hard is it to actually go to those top three customers of your customer and find out how things are going? Is that a difficult thing to do?
[00:03:57] Speaker C: It's actually a very simple thing to do. Getting responses these days can be a little tricky. People are not responding from. What I'm understanding is as much as we, we used to get information from trades in the good old days, but yeah, it's a fairly easy thing. You know, there's a form you can just send to these people by email, you can pick up a phone and call them.
These are all things that are fairly easy to do. And, you know, most professionals will answer.
[00:04:33] Speaker A: Okay, and if you don't have time to do. Sorry, sorry, go ahead, Mark, I was.
[00:04:39] Speaker B: Going to say, and if you don't have time, and I think you were going to head this way, there are firms out there that will process a credit application for you, getting bank references and trade references, and they'll do it in a fairly efficient manner, not only from a cost standpoint, but also from a time standpoint, because you want that information back as quickly as you can get it, because you might have an order sitting ready to go.
[00:05:12] Speaker A: Let's go on to the second question. Asking for financial statements. I think that this would probably be an awkward thing to ask for.
From your standpoint, when you were credit managers, was it a difficult thing to do?
[00:05:27] Speaker C: Yes, I was uncomfortable, quite frankly.
But as you get more practice that it actually becomes quite simple. And, you know, you're loaning these people money essentially, that's what you're doing, and you're not asking necessarily for a guarantee. Although I've been in the credit manager position where we did get personal guarantees from the owners of companies.
So asking for financials initially is uncomfortable, but with practice you can do it quite easily. And with our insurers, this is something that we do as common practice. We go out, we get the financials.
Sometimes I work with my client to get them for the insurer so that we can share that knowledge and maybe fight for that limit a little more. But no, this is something that is essential to have. And if you, there are courses on how to read financial statements, so that is something that every credit manager should have in their back pocket, understand how to read those financials so that you know whether this is a company that's worthy of credit. I have had so many clients call me and say, why is the insurer not insuring a certain credit limit? And we're looking at public companies financials and, you know, they're showing, they're posting operational losses, so it's a risk, but there's still equity left in the company. So in some people's minds that's a really good thing. But posting these huge operational losses is nothing.
But at the end of the day, we need to understand what the relationship is between the lending and the purchasing power.
And some of these insurers are so good at it that they could tell you within a month or two of when the next bankruptcy is going to occur if something doesn't change. So they're very good at this.
So asking for financials, but understanding them, I think is also key.
[00:07:46] Speaker A: Mark, do you have anything to add on that?
[00:07:48] Speaker B: Yeah, I think where the real fear in asking for financial statements comes from is more smaller to middle sized companies who don't necessarily have a professional credit department. And, you know, those individuals in those companies, whether they might be owners or controllers, they don't like to ask for financials in fear of losing business that they might get. And you have to overcome that fear because like Michelle said, you're lending them money and you're not secure.
Their bank is secure and they are getting financials. And you know, the real, you know, the real problem is getting a half a million dollar order for a company and not knowing financially whether they're going to pay you or not. So, you know, that's the real fear that you have to overcome, is asking for those financials. And for the most part, I found that when we told a client, you know, I can't grant you a half a million dollar line of credit unless I see your financials and that's our company policy.
Then it became easier to get those numbers.
[00:09:20] Speaker A: Yeah, yeah, I like the way you frame it. I mean, we were talking about granting credit, but basically when you turn that around and say you're loaning the money, like you want to know what's going on, so that when you loan that money, you can be sure that you're going to get it back. Right?
[00:09:38] Speaker C: It's a case of a sale is not a sale until it's paid.
[00:09:43] Speaker A: Exactly. Exactly. Okay, let's talk about setting fixed credit limits and stopping shipments when something starts to get past due.
You guys probably have seen this many, many times.
How do you set those fixed credit limits when you don't have that credit department doing all the research and it's up to you to figure it out.
[00:10:06] Speaker C: So I've seen this a number of times where the company is not setting credit limits and that's actually quite frightening because they're at the mercy of the client and the orders that are coming in. So they don't have a department in place, so they don't have the checks and bounds. And it's unfortunate because they can get overly enticed by someone who is just nothing as credit worthy as we may believe.
So setting that credit limit is huge. So someone who's good for $10,000 is not good for 10 million. But you know, you mentioned setting the credit limits but also stopping shipments when past due. And I think that's huge as well because that's your leverage.
That's your leverage to get paid and you want to set those boundaries and make them very clear for the client. So that way you do get paid and things don't get out of hand.
One of the things that I used as a credit manager at one point in time, and we're going back too many years to count, but a company by the name of byway I think it was, and my credit insurer had given me a credit limit of like $60,000 but they could buy an awful lot more. And I kept putting the brakes on this thing and asking for, you know, pay it down, pay down your balance and we'll ship some more. And we kept working like that for quite some time.
I eventually left that company and the person that followed me unfortunately didn't have the same kind of training that I had and was pressured by sales, which is a completely normal thing. These are the dynamics that happen in every company. Sales wants to sell credit wants to maybe put a break on the bad sales. Right?
And so they went gangbusters and eventually it went, it went bust. So they were left with an uncovered portion of that receivables. So they had made sales over and above the credit limit that I was holding back.
And so they were at a loss there, you know, unfortunate thing to hear. We'll never mention the name of that company, but this is also why we have to set those credit limits or we get into some danger zones.
[00:12:41] Speaker A: Yeah, Mark, what do you have to add to that one?
[00:12:44] Speaker B: Yeah, back in the day, which is hard to remember these days, but I had 3000 customers across the country and it would have become very, very easy to not have appropriate credit limits. But we couldn't manage our customers unless we did. And so anybody who was outside of their credit limit immediately orders stopped. And it allowed us to, as the exception, to manage expectations for not only our internal sales department, but also for the client. And they knew exactly, and everybody knew exactly where they stood.
It could have been the case, though, that, you know what? We let the order go knowing that a payment was coming the day after tomorrow, and everything would have been fine within a couple of days, but at least it set expectations for everybody internally and externally.
[00:13:54] Speaker A: Okay, so let's talk about why claims are actually denied.
[00:13:58] Speaker B: For the most part, insurers want to pay claims.
You know, they get premium, and they expect that there's claims that are going to be processed through them. And the reason why they get denied is because a, the appropriate coverage may not have been in place, not enough coverage. So part of the claim may get processed and part may not. And then it could be the case that you did something wrong where you were shipping orders when the client was well past due. And there's typically a clause in an insurance policy that says, beyond a certain point, no new orders, no new invoices are covered until a client gets back into the green zone of how much past due is on an account.
And that's typically where we see the majority of claims being denied in our game. I don't know what you. What you think of this, Michelle.
[00:15:16] Speaker C: Know who you're selling to have that name, have the right name on. On your invoicing.
You know, you go back to that initial document, which is your contract, which is the purchase order, and find out who you're dealing with.
There's so many fraud cases, and, you know, and it is so easy. Like Mark was saying earlier, the numbered company that has a trade style, you want to know who you're dealing with. So I've seen a couple of instances where insurers can't pay simply because the right name is not on the invoices, you know, or we've requested coverage on a different company, it's not the right one. So you want to make sure that you know, you know who you're dealing with.
Another thing that I've seen is lack of sufficient documentation to support the credit extended.
So the discretionary credit limit can be a bit of a challenge, or we didn't request a big enough limit. That can be another obstacle.
You know, we ask for $100,000, but then we end up shipping 200,000, and then there's an event which. Which is triggered. The insurance policy so the exposure on that receivable is 200,000, but my credit limit is 100. Well, guess what? There's $100,000 the insurer cannot pay.
Had we requested the 200, maybe we would have got it, but that we'll never know because we didn't do it right.
So those are other instances that I've run into.
[00:17:06] Speaker A: Okay, let's talk about. I'm pretty sure some credit managers just go and say, okay, I'm just going to go and get a credit report. It's going to tell me what's going on under the hood of this company, and I'm going to be good. Why do you suggest that this is not the answer or this is not the research tool you need to use?
[00:17:27] Speaker C: It's part of the answer, but it's not the only answer. I mean, it's like unemployment insurance. As far as I'm concerned.
The credit report will tell you historically what's gone on, but it's not necessarily telling you what's going on right this moment. And there may be things that the credit agency doesn't have insight on.
So you can't always know 100%. What's interesting is our insurers are relying on that information as well to make their credit decisions. So here's the thing. As a credit manager, I made a decision to ship to a client based on the information that I had received. However, that's not bulletproof, right?
If I have a credit insurance policy and it pays out when I, as a credit manager, have made a mistake, that's where I'm talking about unemployment insurance.
[00:18:26] Speaker A: Okay, Mark, do you have anything to add?
[00:18:29] Speaker B: Yes, it's, you know, as I like to say, granting credit is an art and it's not a science. And every credit decision is based on a gathering of information from various sources. So a credit report is one source, trade references are another source, a bank reference is another source. And really what's important is getting to know who your customer is, how they do business. So when I was a credit manager, every one of our largest clients was visited by either myself or a member of the credit department.
And the first thing we did, and I was taught this by my boss at the time, was drive around their building and just see what kind of shape it was in. Was there garbage lying all over the place?
Because that's typically an example of what's going on inside the building as well.
And you go and you chat with these people and you find out how they run their business, what kind of people they employ.
And I mean, in some cases, it's just a basic decision based on the guy you meet, the story he tells, and all of the other information that you've gathered that helps you make a good credit decision. And you have to continue to do that because things change.
They used to change every couple of years. Nowadays, when you're granting credit, six months is a long, long time. And if you're not continually watching and updating yourself on those large clients who could really hurt you if they go away, then you're not really doing your job.
[00:20:38] Speaker A: Okay, I want to ask one more question, because we're almost out of time, but how can receivables insurance be like your company's credit policy? In a box? So explain how this solution works.
[00:20:53] Speaker B: So I think if I can, that's kind of an interesting scenario for a lot of smaller and mid sized companies who don't have a credit policy and B, a full time manager of credit and collections in the business. The insurance policy will give you a certain amount of information that you must acquire to grant credit under a discretionary credit limit. So once again, trade references, credit reports, bank references, financials, depending on the size of your discretionary credit limit. And it allows you to then formulate a credit policy from that that can conform to the insurance policy. And if they work together, you're always getting good, valuable information on your clients and able to grant credit that you're comfortable doing without having to necessarily experience a loss.
[00:22:07] Speaker A: Michelle, what are your thoughts? Absolutely.
[00:22:10] Speaker C: 100% mark is he hit it on the head there?
Yeah. The only thing I would add is your payment history can be part of that way we determine credit, but 100% mark has it wrapped up nicely there.
[00:22:30] Speaker A: Okay, perfect. I really appreciate both of you sharing your stories. And I'm wondering, is there any final thoughts? Because we are running out of out of time, but are there any final real life stories you can quickly share that would sort of put this in a nice little frame for us? Michelle, you're nodding and smiling, so can you give me a quick story in about 30, 40 seconds?
[00:22:54] Speaker C: I'll try. I had a client when I was credit manager, I had a client and we had a credit insurance policy and I had a small discretionary credit limit. So there was. He was new to the country. He didn't have a whole lot of references that, you know, Bell Canada was a reference, but, you know, but I had a good feeling about him and so I went ahead and I gave him some credit, and we built up slowly over time. And today he is now a competitor of the company. I used to work for. So it just goes to show that, you know, the power of the discretionary credit limit and the power of credit has in the workplace, it is.
Anyway, it's a success story for him, and it's one that's not lost on me.
[00:23:49] Speaker A: Okay, Mark, over to you. What's your story? You can share?
[00:23:53] Speaker B: Well, mine sort of goes in the opposite direction. But, you know, I go back to meeting clients and we were getting a bunch of orders for a company, and I decided, you know what? I got to go see these guys because I know nothing about them. They're fairly new. And so I went out to see them and I met with the president and had a meeting with them, and I had this really bad feeling, you know, just from the whole conversation. And at the end of the day, you know, we were shaking hands as I walked away, and I, I looked down to see whether I still had my watch on my arm because that's the way I felt about the guy. And about six months later, they filed for bankruptcy and I kept the minimum amount of credit available to them at the time and walked away going, you know what? I knew that was going to happen.
Sometimes you just get a feeling.
[00:24:59] Speaker A: Yeah, well, what's interesting about that is that you both mentioned trusting your gut. Your gut was telling you something, so you set it up so that you could make sure your gut was right and it worked out for you. That's. Those are great stories. I really appreciate you both talking to me about avoiding the pitfalls of granting credit because I think this will be a really helpful conversation to people. And we will have a part two on this where we'll talk to you guys again about those who actually have a credit department and how they look at granting credit. But I appreciate your time right now and thanks very much for joining me.
[00:25:36] Speaker C: Thanks, Janet.
[00:25:37] Speaker B: You're welcome.
[00:25:38] Speaker A: You're welcome. So Michelle Davey is president of credit assure. She is the new chair of the Receivables Insurance association of Canada. And Mark hall is vice president at Elevate Global Insurance, and he is also a member of the Receivables Insurance association of Canada, both really longstanding members. So thank you very much for joining us for the Trade Securely podcast, and we'll see you next time.
