Johnstone Supply is the second largest whole supplier of HVAC (heating, ventilation and air conditioning) parts and equipment with nine branches in Pennsylvania, Maryland and Virginia, and has been in business for more than 40 years.
Growing credit risk during periods of rapid expansion
Access to better financing
When Johnstone Supply decided to pursue a plan for high growth that would expand its operations into nine locations and grow its sales from $9 million to almost $40 million, Company CFO Jeff Green, was particularly concerned about the credit risk that could arise during periods of rapid expansion.
As the company expanded outside of its original locations in Maryland, Johnstone Supply was taking on new customers the company’s management did not know personally or by reputation. “We knew that some new customers were shopping for great service or based on price, but we were also concerned that a lot of new customers were shopping for credit because they could not get it elsewhere,” said Green.
As the former CFO of a seasonal supplier to retailers, Green has seen firsthand the positive impact credit insurance can have on a company’s financial strategy. His former employer was one of the suppliers affected when one of its key buyers, Kmart Corporation, filed for Chapter 11 bankruptcy in 2002 while owing more than $1 million. Without credit insurance to cover the loss, that firm may not have survived.
“We work to uncover the underlying reason. In some cases, a lack of current information may be the reason for the problem, which is relatively easy to remedy with updated and new information about the customer’s financial situation. About half the time, just bringing new information to Euler Hermes attention is enough to support the credit insurance levels for a given client. There’s an openness to the review process that I appreciate,” said Jeff Green, Company CFO
The tipping point for buying credit insurance was a contract in which Johnstone Supply offered a customer an initial line of credit of $990,000. “As a $15 million company, that million dollar exposure has the potential to put us out of business if we have trouble collecting that receivable,” said Green.
“Insuring a significant portion of that amount through Euler Hermes gave us the level of comfort we needed to pursue and expand that relationship and others.” Johnstone Supply was able to bring on more business, without the credit risk, through Euler Hermes guidance and protection. “Euler Hermes offered something we expected from a cost perspective, which other vendors did not. It also has a reputation for paying claims when necessary” Green said.
Johnstone Supply now has blanket credit insurance coverage for every new customer it acquires in its new branches, as well as its current customers. The ability to expand the business safely to both new customers and current customers alike has provided profits/returns which far exceed the investment in the credit insurance policy. “We still conduct credit underwriting and analysis and manage our collections,” said Green. “Credit insurance gives us the confidence to expand faster than we would otherwise.” With credit insurance in place as a backstop, Johnstone Supply can take time to see how new customers manage and pay their invoices before determining what level of long-term credit Johnstone Supply can comfortably extend to those customers.
Having this level of credit insurance in place has helped Johnstone Supply improve its business and financial position in many ways. “Credit insurance has a cost but it also yields multiple layers of benefits,” said Green. Here are key benefits Johnstone Supply has realized from purchasing credit insurance:
Access to better financing. Johnstone Supply’s banking partners have been more willing to give the company larger advances against its accounts receivable because they know the credit insurance underwritten by Euler Hermes is in place.
Stronger sales. Johnstone Supply’s sales and marketing department also leverages this credit insurance as it manages and targets sales. With credit insurance in place, Johnstone Supply can afford to take on a wider range of customers with different credit needs. “
Credit insight and data. Euler Hermes provides credit insight and data that Johnstone Supply can use to decide whether to extend credit to new and existing customers, and how much.
If it turns out that a customer’s financial position is not as strong as it once was, Johnstone Supply might push for a joint personal guarantee of payment from owners or reduce the customer’s credit limit if it cannot obtain credit insurance on that customer. This proactive approach allows Johnstone Supply to deal with each situation before it gets too severe. “This gives us more options to resolve it,” said Green.