Big Bankruptcies Wake SMBs Up To AR Insurance

When Sears announced its bankruptcy as 2018 came to a close, the headlines focused on the dramatic climb and fall of a 126-year-old retail institution. Now that the company has emerged from bankruptcy, the market will be closely watching the changes the company makes in its operations and financial management strategy – and how consumers will respond to it.

Beneath those headlines, though, is another story about Sears’ business-to-business relationships. Last October, with initial rumors of bankruptcy beginning to boil, three Sears suppliers had come forward telling reporters that the company had missed payments in the last several weeks. Reports at the time warned that, typically, vendors receive just “pennies on the dollar” when their large corporate customers land in bankruptcy court. One vendor ultimately sued Sears for $840,000 worth of unpaid invoices.

Not all vendors were surprised at Sears’ struggles.

“We went into business with them with our eyes open and knew this day would come one day,” one vendor told Reuters at the time.

Even as suppliers acknowledge the risks that their large business clients pose, David Waldorf, founder and CEO of ReceivaSure, says small businesses still struggle with education and awareness of the solutions that could offer them a crucial helping hand in cases like Sears’.

“About 75 insurance agencies out of 35,000” currently offer accounts receivable insurance, he said, “and those agencies are almost exclusively focused on mid- and larger-sized companies. You have this distribution and education gap preventing small businesses from even becoming aware of its existence and benefits.”

Even when cases like Sears hit headlines, small suppliers are rarely at the center of the conversation. Toys R Us‘ bankruptcy last year led to revelations that vendors had extended hundreds of millions of dollars in trade credit to the struggling toy retailer before its filing, with the company ultimately paying only a portion of its debts to vendors.

“Many of us are toy entrepreneurs. This is what we do for a living – we’re not finance majors, we’re not Wall Street guys, we’re not lawyers,” said the CEO of one Toys R Us toy supplier in a Retail Dive report in August.

Waldorf said Toys R Us’ Chapter 11 filing failed to garner enough awareness about the role that AR insurance can play for small suppliers, particularly those that lack a dedicated risk management department, or that work with larger insurance brokerage companies that are able to offer such a product.

What some bankruptcy cases have managed to do, however, is draw attention to the issue of delayed and late payments to small suppliers. In the U.K., the collapse of a major government contractor, Carillion, shed light on its late supplier payment practices and opened the door for efforts to introduce timely payment regulatory requirements. Again, however, small businesses are not making the connection between late invoice payments and the need for AR insurance, though Waldorf noted that lengthening payment terms are a growing issue for small vendors.

“That trend is proliferating,” he said. “I would describe it as a growing distance between companies’ receivables and payment terms: As small businesses are accessing goods and services from large corporations, their terms are getting shorter and shorter – and their customers want to pay on longer and longer terms.”

The issue of late supplier payments not only presents an opportunity for AR insurance, but also shows the importance of combining AR insurance with other effective cash management solutions. Waldorf said that delayed payments demonstrate the importance of having an effective collections strategy, and the opportunity for small businesses to work with third parties like ReceivaSure to access collections services that can support an SMB in the instance of a late payment – even when corporate customers are in a different jurisdiction with different bankruptcy laws, currencies and languages.

And contrary to what some small firms may assume, AR insurance isn’t only an alternative product to adopt instead of external financing solutions like factoring. Indeed, Waldorf said, integrating AR insurance can actually mitigate risk for third-party financiers, both traditional and alternative, widening small firms’ access to financing tools, like asset-based loans, and potentially reducing the overall cost of financing.

“[AR insurance] allows the financier, for example, to make export receivables eligible as part of the borrowing base,” Waldorf explained. “In the absence of it, if someone faults on their loan, [the lender] does not want to perfect on an $8,000 receivable in Egypt.”

Technologies like machine learning and artificial intelligence are also not only lowering the costs and barriers to adoption of AR insurance for small businesses, but are also making the product a more cost-effective one for brokerages to offer. As the industry expands its AR insurance offerings, and as small businesses become more aware of the product, Waldorf sees upcoming disruption in the relationship between AR insurance and SMB finance. It could be the result of not just rising SMB awareness, but also growing awareness in the finance community of the impact AR insurance has on risk mitigation offers.

“What’s really interesting in this world is the nexus of online digital accounts receivable underwriting and online marketplace lending,” he said. “You combine AI with that, and perhaps blockchain. I think that could be extremely disruptive to existing commercial lenders.”