Major League Baseball’s trade deadline passed last month, with the swapping of longtime fan favorites like Padre-turned-Red Sox Eric Hosmer and emerging superstars such as National-turned-Padre Juan Soto reminding us that professional baseball is very much a business. While some transactions will prove beneficial to both organizations in two-team trades, there are no guarantees. Some deals will be viewed as lopsided in favor of one team, others as beneficial to no one.
Unfortunately for those who don’t receive the promised benefit to their transaction, there’s no Trade Credit Insurance (TCI) available for MLB player exchanges. If you’re in the business of selling goods and services, however, TCI could be invaluable protection against customer non-payment due to protracted default or insolvency, political events and acts of war. In addition, TCI can provide the added benefit of facilitating global trade.
Also known as Accounts Receivable Insurance, Trade Credit Insurance serves three basic functions, as explained in this 2021 video:
- Protection of cash flow and equity in the event a customer is delinquent in payment or altogether insolvent.
- Insight and support to a company’s existing credit process through the insurance company’s real-time monitoring of customers’ credit profiles and knowledge of geopolitical situations — benefits reducing the likelihood of unexpected bad news and enable the insured to address trade credit issues proactively.
- New opportunities, thanks to banks’ fondness for Trade Credit policies, for expansion into new markets and for capital to fund continued growth.
Trade Credit Insurance also strengthens a business in its competition for customers by enabling faster decision-making and by increasing the feasibility of extended credit for certain customers.
As Investopedia reported in February, “TCI generally makes businesses more comfortable extending credit because the risk of default is significantly mitigated. In industries where most of the major competitors already carry TCI, having a loss-mitigation strategy can be a necessity just to stay competitive.”
Timing and Coverage Options
Whether your business is baseball, manufacturing, distribution, staffing or logistics, timing matters. If you don’t already have a TCI policy, now might be the time to get one. The lingering effects of the COVID-19 pandemic, historic inflation and sanctions on various global entities continue to disrupt international supply chains, leading Moody’s Analytics to say in a May release, “Staying Ahead of the Evolving Trade Credit Landscape”:
“Trade credit has historically been a valuable resource for the growth of businesses while establishing and nurturing long-term customer relationships. But in current market conditions, Trade Credit Managers are under pressure to increase their productivity and reduce error rates.
“These demands mean that Trade Credit Managers need to continuously learn new and updated ways to create more effective and efficient processes for internal credit management programs.”
An essential component of most credit management programs is Trade Credit Insurance, which includes multiple policy options to accommodate the line of business you’re in and the requirements of your transactions. Options include:
- Multi-buyer — comprehensive protection designed for companies that are willing to take on some degree of risk while backing up their own credit management with an insurance partner;
- Named Customer — coverage designed for companies whose portfolio of customers is weighted toward a few top accounts with especially large exposures;
- Single Customer — protection when a company has one customer whose failure to pay would have a severe impact on your business.
According to Insurance Business Magazine, “Accounts receivables typically represent more than 40% of a company’s assets, but 1 in 10 invoices become delinquent.”
That’s where Trade Credit Insurance comes into play. Here are two Alera Group case studies of TCI at work:
- A distributor of hot and cold rolled steel sold to a locker manufacturer carrying an accounts receivable exposure of $700,000. Recognizing that the manufacturer was experiencing financial difficulties, the steel distributor’s insurer reduced coverage from $700,000 to $350,000. Two months later, the locker manufacturer filed for bankruptcy. The manufacturer’s Alera Group broker filed a claim on the client’s behalf, and the client recovered all $325,000 of its outstanding receivables. Eighteen months later, the bankrupt manufacturer filed a Preference Claim against the supplier for $525,000, which the steel distributor was able to negotiate down to $17,000. The Trade Credit Insurance policy covered this loss as well.
- Advised by Alera Group to purchase TCI, a client eventually did so at the behest of its bank. Three years later, after the client’s biggest customer filed for bankruptcy, Alera Group filed a claim for $1.6 million on the client’s behalf. The client is due to be paid in full in September.
Because TCI is a proactive, rather than reactive, form of insurance, it requires extensive information from the policyholder and expertise on the part of the insurance broker. Working with an insurance professional who understands your industry, knows your business and is experienced in providing TCI solutions can make all the difference between customized coverage that makes you whole and inadequate coverage that leaves you on the brink of ruin.
Talk with a TCI expert about making sure your business has the protection it needs, and do so soon. The risks created by the trifecta of global pandemic, international conflict and rampant inflation are making underwriting conditions unfavorable. For most businesses, there’s still time to protect themselves with TCI — provided they act sooner rather than later.
About the Author
Vice President and Director of Global Trade Risk Management
GCG Financial, an Alera Group Company
As Vice President and Director, Global Trade Risk Management, at GCG, an Alera Group Company, Gary Kirshenbaum provides protection for companies who need to manage domestic and export trade risk and mitigate political risk involving international business investments. A former business owner, he has almost 20 years of protecting clients’ bottom line in three major areas:
The threat of bankruptcy or payment default due to a customer affecting equity and cash flow;
Lost faith in information used to make credit decisions regarding customers;
Insurance cost reduction.