The Avoid the Non-Payment Iceberg webinar took place on May 21, 2019 and featured a discussion with industry experts Dan North, Stephen Georgetti, Yaye Essayas, and Kip Fournier. Topics included how to implement new policies that could further protect your business from non-payment, tips and tricks for A/R risk mitigation, sector-specific insights, and observations on the current and future state of the North American economy.
Here are the questions and answers that were asked during the webinar.
Q: If there’s been no inflation, why has the Federal Reserve been raising interest rates?
Dan North: “It’s true that inflation has been very weak, but for the Fed Reserve, they have a tricky job. They’re trying to balance the economy between running too hot and too slow; however, it takes a long time for their actions to go into effect. For instance, suppose they think the economy is starting to run too hot, so they raise interest rates. The effect of that interest rate hike doesn’t get felt for an entire year throughout the economy. They have to think about inflation a year from now, not inflation today. And they’ve been seeing all kinds of signs that would typically say inflation is on the rise— as a 49-year low unemployment rate, for instance.”
“It takes a year for those actions to take place. Now you remember the Fed last year raised interest rates four times, the last two times were in September and December. Those hikes haven’t filtered their way through the economy already. In other words, there’s still monetary policy tightening in the pipeline. This is one of the reasons we are concerned about late 2019 or the first quarter of 2020, where we could really see a significant slowdown.”
Q: Does Euler Hermes alert its clients of uninsured customers who are not paying others, or is the data only used to figure out how much coverage they’re willing to provide? This is in reference to past due reporting data.
Stephen Georgetti: “We do not disclose the nature of the past due reports on a per company basis. That is confidential information. However, what we do share is aggregate at a sector level—like what we showed today. If we decide to action coverage, we can disclose that it’s because of slow payments, but we can’t disclose from which supplier. We provide great information at the aggregate level, which will manifest itself in individual credit limit decisions.”
Q: How do you still collect with a big company when they won’t return your calls and/or paperwork?
Kip Fournier: “Unfortunately, if they're not returning your calls or paperwork, you may already have a problem. This is where I mentioned that most credit policies deal from today backward instead of today forward. You want to ensure that you follow the correct procedures up to that point. But if you have a valid claim, this is why people purchase trade credit insurance because there are several mechanisms that we can put into place to help you collect that debt either through direct collections, or if it can't be collected, we, as I mentioned before, will simply pay you for that invoice.”
“More importantly, the real advantage we have is we take that data and turn it into actionable information beforehand. We might have been able to help you figure that out a buyer’s non-payment behavior before you ever sold to them.”
Q: Why haven’t wages risen?
Dan North: “This is a common complaint and a common narrative that wages haven't been raised. And let me just say bluntly that it’s not true. Right now wages are rising at 3.2%—that is, depending on how you're measuring it—above average, and even after you strip out inflation, the so-called real wages, that is above average as well. More importantly, the argument is Americans have not had a wage increase in 20 years and that's not true. People are just looking at it the wrong way.”
When we say that people have not had a wage increase, it means that hourly wages were, say, $25 last year, and $25 this year. But that $25 this year is a snapshot in time of the entire labor force from ages 16 to 75. And the $25 from the year before is a snapshot in time of the entire labor force from ages 16 to 75. In other words, you're looking at virtually the same labor force year-after-year, and they each are comprised of basically of the same distribution.”
“However, if you follow an individual through time, their wages absolutely do go up. You know the common example, we think of somebody flipping burgers at McDonald's and they start at $7.50 or $10.00—depending on where they are in the country—and then they start getting more productive and they get a raise after a few years, and then maybe they go to community college and get more productive, and they get a raise after that. And you follow them through time, their wages surely rise and this is the way it should work. You get more productive through your lifetime and you get paid more through your lifetime. So, the notion that wages haven't risen is kind of wrong on two counts. The historical data doesn't jibe. And people tend to think about it the wrong way. Taking a snapshot in time from one year to the next is the wrong way to look at it. You have to follow people through time.”
Q: Is the data about our buyers’ buyer available to us in any way other than the amount of coverage you are willing to extend?
Stephen Georgetti: “There's confidential information and non-confidential information. Non-confidential information is anything that's public, for example your public companies we can discuss openly and transparently. Unfortunately, only 3% of companies in the U.S. are public—most are private. And to get information from them is the biggest challenge we have as risk professionals in the U.S. What we have to do is gather this information through a nondisclosure agreement, which really precludes us from ever discussing the nature of the financials with anyone else.”
“What you will get in return is a Euler Hermes risk rate on a buyer. On a scale of one to 10, one, for example is being AAA or Walmart and 10 being a defunct corporation. We typically provide some guidance with what a typical one looks like, and what a typical five and a 10 looks like; however, we usually cannot disclose the nature of the information unless, of course, it's public.”
Q: Is my understanding correct that you approve the customer we want to take on and then you issue the insurance?
Kip Fournier: “What we really do is we work with companies to determine who their buyers are beforehand. Our risk team evaluates and then we create a policy around those buyers. So, that’s your existing business. The way we help you grow your business as Dan mentioned very early on, through safe sales, is with a name and a click.
“Once you have a policy in place with our system, with a name and a click, you can figure out whether or not it is safe, and then you can make the determination very quickly. We provide that information for you once we understand what your company does, what sector you work in, and what your existing list of buyers are. What we first do is issue the policy, and then you can grow and work with that policy as your company grows.”
Q: Dan, you advised that spending under pressure due to weak income growth, you get wage growth at a 9-year high. Can you please explain?
Dan North: “There are a couple of different things here. Let’s say wage growth is 3%. Income growth is something like 3%. But more importantly, we're talking about income and wages - that's what you get paid, but that’s not necessarily what you're going to spend. The consumer, even though they're saying we have high confidence, they're actually very concerned about the future. They have growing incomes and wages, but it doesn't mean they're spending it and they're not. The most recent reports on retail sales have been evidence of that. You’ve got to separate out the income growth and consumption.
In addition, wages are what you get paid for going to work. Income includes wages, plus income you might get from interest on a bank account, or dividends, or investment income, or money from social security, for instance. Wages are only part of income and that's why there can be a difference in growth rates.”
Q: Do you require your policyholders to stop doing business with their clients if you see an uptick in past dues or claims?
Yaye Essayas: “We never dictate to our clients whether they should do business with their clients. We may look at the payment incidents and point out that we have issues, and we may even decide to take away the coverage that we're providing for our clients, but we will never dictate to them whether they should stop doing business or not.”
Q: What are the size parameters of the companies you offer coverage to? Do small businesses typically use your offerings?
Kip Fournier: “Any company of any size can benefit from our policy; however, there's usually a minimum amount of volume before it becomes cost-effective for a company to utilize our policy. If you're not growing that quickly or you're a relatively small company, probably less than five million, you may not get the full benefit.
However, you may—depending on what sector you're in. My recommendation is to reach out to one of our agents across the country and we'll figure out if it does or it doesn't. The second part of the question, it really depends on a couple of factors, but many small businesses, in their mind, they say, ‘I'm small, I do 10 million.’ Well, that's actually not that small. Or even in their mind, they do two million, but they're growing two million per year. That's someone that with that rapid expansion may want to have the ability to with a name and a click have an invoice protected under the policy and continue that rapid growth. Sometimes rapid growth is a business' killer because they extend themselves too far, then their buyers don't pay them, and then they're in a really bad position. It depends on a couple of factors, but we work with all businesses probably down to about three million, maybe a little smaller and all the way up to a billion.”
Stephen Georgetti: “And that goes nicely in the risk side, too, because historically, it's been very challenging for us to monitor and underwrite small businesses because there's just not a lot of information. You have a credit report, which is pretty scarce, and so when you're faced with $100,000, $50,000 credit requests, what you are assessing that on.”
“Today, I'm really happy to discuss the fact that we're part of the SBFE, the Small Business Financial Exchange, which enables us to have much more information on SMEs information such as credit card utilization, revolver balances, and high credit limits. These are things we never had before from an underwriting perspective. Monitoring perspective enables us to accurately and intelligently assess risk and grant coverage in a space where it's been very challenging for us to before.”
Thank you to those who asked these questions. Please free to contact us with further questions or feel free to enjoy some helpful credit insurance resources.