Under cover
Although credit is still an issue it remains essential for risk management
It’s certainly easier now to talk more openly about issues of credit – particularly credit insurance -- and its impact on credit availability.
I saw an article in the Daily Mail in January discussing difficulties faced by HMV. It alleged reduced supplier cover by credit insurers, including a quote from an email sent by the head of credit of one principal supplier outlining their restricted supply.
Inappropriately, the article also shows pictures of empty Woolworths stores -- citing loss of cover as a major reason for failure. Bunkum!
Woolworths was heading for a fall well before credit insurers and suppliers had elected to reduce their exposure; indeed, credit insurers collectively lost tens of millions of pounds on retained but reduced cover when Woolworths finally succumbed to administration.
HMV’s performance has declined and it remains ensconced in a market where demand has been eroded by new technologies. Having said that, HMV is the largest retail chain for suppliers of CDs and DVDs, and remains important.
Sensible underwriting, whether outsourced totally or partially to credit insurers is a practical, rational requirement of any business lending money or supplying goods on open credit. Shame, in fact, that the banking community lost all sense of direction and control in areas such as this. And we all know where that led us.
If you choose to outsource your credit risk totally to credit insurers, and your model of business is comfortable with this, you have little scope to manage risk directly yourself.
If, however, you adopt a policy of cover to supplement your own internal risk judgements, you are freer to take a measured and calculated risk where cover is not granted or reduced. In either case, you are engaged in business and ultimately must decide whether to supply on credit or not.
I defy anyone to say he or she would not reduce exposure or even remove it if he or she felt the client was in danger of imminent collapse.
Credit insurance is not the wicked witch of asset security; rather, it is a useful tool that facilitates growth and funding. Yet I fear that many who opt for credit insurance don’t fully understand the various policy types on offer, and select one totally inappropriate to their business needs.
Brokers can be extremely helpful, but ideally one should turn to specialists with first-hand experience of working with credit insurance. They will spend far more time looking objectively at markets served, client base constituents, overall position of the company and history, its management controls and credit management efficiency.
Credit is a business driver and fuels sales growth. Properly delivered and managed, it easily adds up to 15 per cent to the top and bottom line profit and loss statement. Credit insurance and general risk management are important contributory constituents.
Credit management must offer business a competitive advantage and clients rightly demand increased levels of ‘touch’ and support beyond just simple credit line availability. Suppliers that recognise this will be the ones that win.
There should be no howls of derision or cries of unfair play when credit insurers remove or reduce cover. Their judgement is sound generally, and not dissimilar to those by suppliers seeing increased risk in their clients on open credit. Unlike suppliers, however, insurers are often not in a position to answer back to frequently unfair criticism of this nature.
Edward Pacey is managing director at EP Credit Management & Consultancy