Confectioners offered credit insurance tool for unpaid bills
Ushered in by the US' National Confectioners Association (NCA), the group claims the core benefit of its credit risk scheme, designed for member companies, is the "cost-effective" credit insurance.
"If the client does not pay a valid account receivable, a financially sound insurer will, subject to co-pays or deductibles, as applicable," says the association.
"For only 10 to 30 basis points (1/10 to 3/10 of one per cent) of revenue, you can insure your accounts receivable against credit loss. For a firm with $5m in annual revenue, the typical premium would be between $5,000 and $15,000," explained the NCA, whose members include Cadbury, Jelly Belly Candy, Wrigley and Mars Snackfood USA.
Operating in today's volatile business environment, businesses across the board are carrying the risk of non-payment. The NCA suggests that its member firms are "particularly vulnerable to credit risk" due to the relatively low margin nature of the industry and the "concentration of sales over relatively short holiday periods".
"This vulnerability is compounded by the fact that accounts receivable amount to a very large segment of the total assets of the typical NCA member. Non-payment of even a small portion of its receivables could be devastating to many member firms," comments the association.
For example, adds the NCA, a firm with a 5 per cent net margin would need an additional $2m in revenue to make up for a $100,000 A/R (accounts receivable) default.
The NCA credit risk tool
According to the confectioners association, in addition to the insurance component, the credit insurance carriers make available a variety of other tools and resources "designed to reduce the incidence of non-payment."
These resources include access to expert evaluation and "proprietary databases" that enable management to quickly evaluate evaluation "the creditworthiness of both existing and potential clients".
In addition, the NCA suggests that with a policy in place and the underwriter’s approval, confectioners have the ability to offer credit terms "to new and high-risk clients without assuming all of the risk".
"As long as the potential client is approved by the insurer, you can pursue business opportunities without shouldering all of the risk," states the association.
Further, by reducing the risk of unpaid bills a confectionery manufacturer, supplier or broker "will enhance its creditworthiness" and could, potentially, command more favourable credit terms from its lenders.
Finally, the NCA's risk management instrument includes a “political risk protection”. For firms operating internationally, the credit insurance can protect against non-payment due to governmental action.
FDF in the UK highlights credit insurance
Speaking ahead of the UK's annual budget announcement, Melanie Leech, director general of the UK's Food and Drink Federation (FDF), honed in on the issue of credit insurance.
“The Chancellor must also provide the right fiscal measures to support the industry through the economic downturn. We need clarity over issues such as trade credit insurance," she said in a statement last week.