Where Credit Managers Fear to Tread

[00:00:00] Speaker A: Welcome to the Trade Securely podcast and part two of our look at how to avoid the pitfalls when granting credit. I'm Janet Eastman and joining me again to discuss this topic are two former credit managers who are now credit insurance brokers. Michelle Davey is the president of Credit Assure. She is also the chair of the Receivables Insurance association of Canada. And Mark hall is vice president of Elevate Global Insurance and he's a broker member of the Receivables Insurance association of Canada. And that's the organization that is bringing you this podcast. So we're calling this podcast Where Credit Managers Fear to Tread because quite often credit managers become concerned about their jobs when the idea of credit insurance comes up. So on this show we're going to do a bit of myth busting to help credit managers understand the value of receivables insurance to mitigate credit risk. So, Michelle and Mark, thanks again for joining me for part two of this podcast. [00:00:56] Speaker B: Thanks, Janet. [00:00:58] Speaker A: So let's first talk about when both of you heard about credit insurance for the first time or receivables insurance, and it's most likely that you first encountered it as credit managers. So Michelle, tell me about your first introduction to it and what you thought of it. [00:01:15] Speaker B: Oh my goodness. It was imposed on me. It was, I had just started a new job and here we are about a month in and they, they closed clue me into this big secret that they are about to get this receivables insurance policy and I'm going to have to learn this. And as far as I was concerned, learning was not the issue but the threat of having an insurance policy take over my job and me be out of a job one day, which never happened, by the way, but it did prompt for four and a half years of me taking statistics to see, you know, how I could get that insurer out of there. So, so that was interesting statistics, let me tell you. [00:02:06] Speaker A: But then, okay, so we're still on this path. What, what prompted you from that position to, to actually become a receivables insurance broker? [00:02:15] Speaker B: Well, there you go. When you start taking statistics and you look at the logical course of action and you see that he minute before I started, bad debts were way up here. And now, now that we have a policy and you know, I've been fighting with the insurer to get limits and this, that and the other thing, and when the insurer was telling me, no, that's a bad risk and I would do my research and find out, oh wait a minute, they're absolutely right. Let's change the way that we do business with these companies. So what did it do? It created an environment where we could actually sell safely. Right. And our losses went down. They didn't go up, they didn't stay stable. They actually went quite, very, very low. So on that note, it was quite a nice learning experience. And the next job I had was to go to an insurer and work as an underwriter. So there you go. That, that was the idea. Okay. [00:03:22] Speaker A: So, Mark, how did you find out about credit insurance? [00:03:27] Speaker C: Well, I was in about four years into a stint at a electronics distributor in Canada, and we only shipped to companies in Canada. But we were growing so quickly it was hard to keep up. And the CFO to the company came to me and said, here, I want to look, I want you to look at this and find out all you can and then come back to me and we'll discuss how we, we might implement this. Little did I know at the time that they were looking to go public as well. So that was an issue that, that needed to be addressed from a credit standpoint. So I started investigating, and back then there was only three or four insurance companies that were actively selling the product in Canada and did a lot of analysis, just like Michelle did on what our historical bad debts were and found that it went up and down like a toilet seat every year. And, and going public, you have to quarterly present your earnings per share. And that was going to affect the earnings per share on a quarterly basis, depending on what bad debts you had. Our margins were very slim on the product we sold, generally anywhere between 5 and 12%. So a big bad debt would have a serious effect on the earnings per share. So I did all the statistical work, came back, we implemented a version of credit insurance that just looked at our top 20 accounts and we went on from there and learned how to use credit insurance to enhance our credit granting capability. But I must say that while I was going through the process of looking at credit insurance, I wondered if it was something that was going to take my job away from me because I thought it would be making all of the decisions for me. And that was far from the case. It was an enhancement to our credit granting capabilities. And sometimes we disagreed with what the insurer thought and a lot of times we agreed. And if we disagreed, we had to make a decision whether we would go uncovered on a particular account. And that was done with senior management's approval because I got them to sign off on that as well. But that didn't really happen that often. It was a really beneficial experience. [00:06:28] Speaker A: Okay, so let's talk about, you know, if you're working in a credit department and you, you don't have credit insurance at this point or whatever. Most credit departments should have a credit and collections policy. So let's talk about what those should look like. And if you don't have one, how do you actually start to create one? [00:06:48] Speaker C: Basically, you have to sit down with the company hierarchy and determine what your goals are for the credit department and what the goals are for sales and how the two can stand together and be an appropriate servicing of your sales growth, your profitability, your reduction in bad debt. If, if that's what you've got, and you know that's, once you've done that, then you can start to devise a policy that, that meets those goals. So I don't know what Michelle's got. [00:07:34] Speaker B: Yeah, absolutely. I, you know, I would just add to that and say, say what you do, you know, on a regular basis because there's always exceptions. There's always going to be, well, this guy's the boss's friend and we could talk for hours on. Just say what you ordinarily do and put it in writing and that's the way to get it started and you can expand on that. And it doesn't have to be perfect the very first time because it's an evolution. The company will evolve. So therefore that credit policy and credit and collections policy, excuse me, will have to evolve with the company as well. So just start off by, you know, do what you say and say what you do and everything should follow through fairly easily. Okay. [00:08:31] Speaker C: To do is to publish that to everybody in the organization so that they all understand exactly what you're going to do under each circumstance that comes up, whether it's an overdue account or granting credit to a brand new customer. You know, it's better to let everybody know exactly what you're going to do in every circumstance. [00:08:59] Speaker B: Yeah. And it helps in the communications with, you know, intra departmental communications that way. I found that there's always a little bit of resistance as well when you're, you're bringing something like this to the forefront because they're used to doing things a certain way. And this may also entail some changes because you know, know what, it might be the smarter, right thing to do. So you may run into those types of issues. But, but yeah, there is always a little bit of resistance to change. [00:09:35] Speaker A: So how does a credit and collection policy then work with a receivables insurance or a trade credit insurance policy. [00:09:43] Speaker B: All right. Well, an insurance policy has parameters, right? So these are the deadlines, these are the ma, maximum milestones for certain things to happen and for a certain way of functioning. So these are like minimums, right? So you can actually have your own policy, be more restrictive internally or just keep in mind that for instance, deadlines to submit a claim you don't want to continue to ship beyond a cease shipment period per se, as an example, when the account is severely past due. Now every insurer has their own way of viewing that, but if your pass is due and it's going against what your insurer would recommend, you can always still do it. But the problem is, are you still going to be insured? So, you know, build something inside of what those parameters may be. Or maybe, you know, look at finding a different insurer because, you know, they're all a little bit different and some have more lax parameters. Some will actually use your credit policy to build on that, on that insurance policy. So it follows you rather than you following the insurer. There's, there's a multitude of things that can be done here, but it's a basis, it's something to work with if you don't have anything. [00:11:25] Speaker A: Okay, Mark, what are your thoughts there? [00:11:28] Speaker C: Well, I think there's, there's two thoughts that I have. One is for companies that don't have a credit and collection policy and this becomes the de facto policy for them. And then you've got the other companies that have a well rounded out credit department who have a credit policy, they've probably had it in place for years. And you can build a credit insurance policy around what they do, just like what Michelle said. And perhaps you can enhance your credit granting capabilities or your credit policy by using some of the wording and terminology and parameters in that policy and enhance what you do or at least justify what you do. So it should work exactly the way your business wants it to work. [00:12:30] Speaker A: Okay? So that being said, it should work exactly as you want it to work with your business. How do you get that best policy for your business? [00:12:42] Speaker C: A specialist insurance broker? I would say there's only one way to do it and that's to hire somebody like me who knows how to grant credit, but also has relationships with all of the insurers in the marketplace and can do the analysis of your business and your credit policies and bring your company to the market in such a way that you're getting quotes from insurers that match up very well with what you do, because as Michelle said, they're all slightly different and Some may just not match up exactly with your business. So, you know, getting a specialist broker involved in your business so that they know exactly how you do things is the most important part of getting the best part of an insurance policy, may I add. [00:13:42] Speaker B: Look at your strategy. Why are we getting insurance? What is it that has brought us to this table? Why are we insuring? Is it for financing? Is it because I have a large buyer that, you know, if they file, that would imperil the company's operations? Why are we here? Right. So if you know to get the best policy for your company, have that available to your broker because that will help guide them toward the best solution to fit your. Your company style. [00:14:25] Speaker A: There's another policy coming in, Michelle. [00:14:28] Speaker B: Sorry about that. [00:14:32] Speaker A: Okay, just turn that off. [00:14:34] Speaker B: Yep. My apologies. [00:14:38] Speaker A: See, there you go, everybody. That's a busy credit insurance broker right there. Okay, so Mark, you alluded to this before, but what is the difference between a broker and an insurer's agent? [00:14:53] Speaker C: So the difference is, is that an insurer's agent works for the insurance company, so they only have one product to sell, and that's their own. An insurance broker acts on behalf of all of the insurance companies that offer the product in the marketplace, or the majority of them. Some don't do all, but most do have the ability to bring all of the insurers to the market if. If need be. So that's the main difference. We as brokers have to know the insurer's policies and how they're set up and how they work. The insurer's agents know their own products quite well, but that's all they have to offer. And so if you don't have competition, you don't necessarily know that you're getting the right thing out there. [00:15:54] Speaker B: The other thing is some insurance policies are more administratively intensive than others, you know, so there's different rules and regulations. So a broker such as Mark or myself could help you determine if there's a good fit with your company and your management style. So again, you know, there's a lot to be said to dealing with a broker, an agent that, you know, it's very legitimate to deal with an agent. Just they don't have the whole picture. They don't see everything, and they can't best advise you on somebody else's product because they don't know the other product necessarily. [00:16:41] Speaker A: It looks like our last question is outlining the benefit for companies looking to grow and the risks of growing without receivables. Insurance talk about this all the time, but I Think, I don't think you can hammer this one hard enough and often enough. So let's talk about the benefits of, of using receivables insurance and the risks that go along with it. And Michelle, we'll go with you first. [00:17:05] Speaker B: So the benefits of insurance. My goodness, lowering bad debts as a management tool. Wow, that's amazing. Right off the bat, this is a product that every company needs. I, I'm 100% convinced of that. That's why I, I like Gillette, I bought the company. But you know, so there's the loss mitigation aspect, there's a financing aspect, there's the, the, the increasing sales aspect. If you're selling to new companies outside of the zone that you're normally dealing in, well, why are we taking a risk? It could be a huge hit. I, I got a call just a couple of days ago from a client selling for the first time to Italy and you know, asking a bunch of questions about trade and this, that and the other thing. But I mean if you don't, if you've never shipped there, how are you going to know if these are good buyers or not? You know, so don't take the hit and I'll leave the rest to Mark. [00:18:16] Speaker A: Okay. [00:18:17] Speaker C: Yeah. The benefits and as a former credit manager for me was that I was reducing the overall bad debt expense of the company. And the way I calculated bad debt expense was the amount of premiums I paid plus the deductible versus what I was taking in bad debts in previous history. And if you're reducing that amount or if the, the first amount is less than your bad debt amount, then you're saving money. And not only that, it's almost a fixed cost versus bad debts can be very variable throughout a, you know, a five year period. It could be 0.2% of sales in one year and point 6% of sales in another year. And that could be the difference between overall profitability and a loss. Also in a fast paced environment, when you're growing your business, your credit limits are growing to each and every one of your customers as well. So where you might be quite familiar with granting credit of 25,000 to somebody, all of a sudden you're tasked with granting $200,000 to somebody and that may be a little fearful for you to do. And credit insurance is a great tool to tell you whether or not granting $200,000 to this customer is a good thing or not because it's enhancing your investment in information and your decision making process there. [00:20:07] Speaker A: So there's, sorry I remember seeing, and I can't remember whose website it was, but it was a tool that you could calculate if you actually took a loss at whatever the, your, your margins were, how long it would take you or how much you would have to sell in order to make up that loss in your year. And the, the calculation like the result was staggering. It's like, oh my gosh, I can't afford to lose a hundred thousand dollars because I'm going to have to sell this much more to make up that loss. So it's things like that little tools and, and things that your broker can help you with that are really helpful to open your eyes, I think. [00:20:49] Speaker C: Yeah. And it's not only I'm just going to have to sell this much more, it's you're going to have to have that much more in very new sales to new customers, not to your existing clients to make that up. [00:21:05] Speaker A: Yeah. Okay, I have a final thought for us both or for you both. And it's, can you share the value of the largest payout of credit insurance policy ever paid out for one of your clients and what would have happened had they not had a credit insurance policy? And Mark, seeing as you're right there on screen, let's go with you. [00:21:27] Speaker C: So the biggest one was $5 million US to a scrap metal dealer in southwestern Ontario, to a steel company who was always on the verge, but we were able to find cover in the marketplace for that. And it was a family owned business and it still is a family owned business 20 some odd years later. And it would have hurt them very badly. They probably would have survived because they've been in business for many years and put away lots of money from their business operations in the past. But it would have been very painful and you know, jobs might have been lost. The ability to buy product might have been lost in the short term, you know, and all of these were prevented by delivering them a check, which I did for that $5 million. [00:22:36] Speaker A: Fantastic. Okay, Michelle, over to you. [00:22:41] Speaker B: It's a toss up, But I think 1.6 million was probably one of the higher ones. And that was in the retail sector. And, and yeah, the, the guy actually told me he would have gone bankrupt had it not been for credit insurance. So, so all that to say it was a very happy day when he got his money and he called and said, guess what, you saved my life. So, you know, but it's a pleasure to hear these things. And, and you know, I'll, I'll always take a call on a Friday night at 7:00 to hear something like that versus oh no, what are we gonna do? I'll take that call too, but. But it's so much nicer to hear. Hey, you saved my life. [00:23:28] Speaker A: Yeah. That's fantastic. Thanks to you both for sharing your experiences and your expertise on this podcast where credit managers fear to tread. I learned a bunch again, as I always do. So thank you. Michelle Davey is president of Credit Assure. Mark hall is vice president of Elevate Global Insurance. They are both members of the Receivables Insurance association of Canada and they are happy to answer any questions you might have. So be sure to reach out to them. We have a member button where you can find their information and contact them on the receivablesinsurancecanada.com website. On social media, you can find us on LinkedIn and on YouTube on our channel TradeSecurely. I'm Janet Eastman. Thanks very much to you both, Michelle and Mark. Remember, cover your assets.