Derisking B2B Accounts Receivable Management

There’s an old saying on Wall Street that “cash is king.” That applies to the private realm as well and ever more so for small businesses.

But even the best small businesses — buoyed by good products or services — can fall into a desperate bid for survival if the cash stops coming in. And given the fact that smaller players typically have a smaller number of buyers on whom they depend, the loss of a steady payment, or simply a reliable one, can have dire consequences.

In fact, studies claim that cash flow issues are what sink small businesses, with one well-known statistic put forth by U.S. Bank: As many as 82 percent of businesses fail due to poor cash management.

Euler Hermes, the United States-based trade credit insurer owned by Allianz, announced earlier this month the introduction of Simplicity, which it has billed as a solution for small companies to help mitigate their receivables risk. The key target user is a business with $1 million to $5 million in annual sales, with special appeal to businesses that have yet to take on credit insurance.

James Daly, president and chief executive officer of Euler Hermes Americas, told PYMNTS: “In terms of probability, there is no general statistic that can tell you the real probability of default … or if buyers will stop paying or even may wind up in Chapter 11.” But with credit insurance, such as that offered online via Simplicity, and the scoring system inherent to the risk product itself, small business owners can get an informed sense of the health of their trading partners and the ability of those partners to make timely payments in full, the executive said.

Euler Hermes looks at each of the buyers along a company’s base, with the ability to track buyers across 32 countries, and compiles information on each of those buyers. Euler assigns risk coverage based on a scoring system that uses a scale of one to 10, with lowest risk to highest risk scores (and recommendations not to trade and where no coverage will be provided by Euler Hermes).

Using a tiered system that offers basic coverage and then more comprehensive coverage (using the aforementioned scoring system), small business owners must offer sales projections as part of a simple online application for total sales volume, and they are fed back a policy premium amount for the year upcoming.

Daly noted that the credit risk policies “do not cover all losses,” but they “do take care of bumps in the road” as businesses expand, and especially as they take on new business with as-yet-untested buyers. The most basic coverage rate is 60 percent of sales, according to the Simplicity platform, and with the most attractive credit risk profiles — at one to six on the buyer grade scale — that coverage level increases to 90 percent.

Daly maintained that the process itself is a simple one, and credit insurance is also attractive in an environment where, he said, “as much as 40 percent of assets on a balance sheet can be made up of receivables.” And, he continued, the risk of not getting paid on receivables remains a greater one than might be seen with other events that do tend to be automatically insured by firms, regardless of size or scale, such as fire or flood, or liability insurance against accidents in the workplace.

Among the industries that may be among the earliest adopters of the Simplicity tool, said Daly, are companies within the food industry (where inventory is perishable and may, due to certain events, have stock that becomes worthless, Daly noted) and textiles, where up and down the supply chain, and eventually to the end retailer (who may be at the mercy of consumers), risk abounds.