Covering losses from nonpayment - credit insurance - Brief Article

Nation's Business, August, 1996 by Ted Jackson

You've been trying to sell that key prospect for a long time. But when you finally close the deal, instead of jumping for joy you are beset by nagging doubts. You wonder whether you are going to get paid. You think you can trust your new client, but you're not sure.

Nonetheless, you would have peace of mind if you had bought credit insurance, a little-known type of coverage that protects receivables against non-payment for financial and other reasons.

"The biggest cause of business failures is inability to collect on receivables," says Peter Rukavina, executive vice president of Credit Insurance Associates, an insurance broker in Chicago.

For small or medium-sized companies, the U.S. market in credit insurance is dominated by two Baltimore-based insurers. One is American Credit Insurance, which says it typically doesn't do business with companies that have less than $15 million in sales. The other firm, Maryland-Netherland Credit Insurance, says it will look at any size of business.

A critical factor in determining the level of premiums is the composition of a company's receivables. If your clients are in an industry with high rates of bankruptcy, you can expect to pay higher premiums.

"We have data on bankruptcies in every industry going back over 100 years," says Glen Heckathorn, president of MarylandNetherland, a credit-insurance joint venture backed by Fidelity & Deposit Insurance and NCM Netherland.

Heckathorn says that premiums usually do not amount to more than i percent of sales. "Why would [any company] assume such a large risk as nonpayment on receivables when the cost of insuring against it is so small?" says Heckathorn.

The market in credit insurance is much more active in Europe, where 25 percent of businesses take out coverage, compared with less than I percent in the U.S.

Another reason to buy credit insurance is that it could help you get bigger lines of credit from your bank. "If you have accounts that are very concentrated in one industry, it can be very hard for you to get much lending on your receivables from your bank," says John Trocher, vice president of marketing at American Credit Insurance. "But even if you have a fairly diversified, let's say $5 million receivables portfolio, your bank won't lend you much more than $3 million on that collateral. We can get you another $1 million with credit insurance."

--Ted Jackson

The author is a free-lance business writer in St. Louis.