In this fast-paced, interactive presentation, you will learn the best methods to manage the two most important types of credit risk - slow payment and nonpayment. View video online now: https://youtu.be/xQ-3nSa8fiI

1. CREDIT RISK MITIGATION TOOLS AND TIPS
Presented by Michael C. Dennis
© 2019. Michael C. Dennis. All Rights Reserved

2. INTRODUCTION
• There are many practical things
you can do to limit credit risk
• Clearly, the best time to manage
risk is when you are evaluating a
credit application
• The next best time is when you
perform periodic updates on
customers
• This program includes ideas for
reducing the two risks we care
most about which are…
• The risk of slow payment
• The risk of non-payment
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3. RISK MITIGATION TOOLS
The most commonly used tools to
reduce the risk of bad debt losses
are…
• Credit insurance
• Mechanics liens
• Personal guarantees
• Intercorporate guarantees
• Letters of credit
• Pledges of collateral as security
• Factoring of accounts receivable
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4. CREDIT INSURANCE
• Credit insurance is a tool that reduces the risk of non-payment and bad debt losses
• Policies can be written to include all customers, or it may be targeted to cover only certain
customers
• Credit insurance policies typically cover certain types of losses, generally events within
the control of the debtor, including:
• Insolvency
• Bankruptcy
• Protracted payment default
• The customer’s refusal to pay for goods received
• Some policies also cover one or more political [aka sovereign] risks
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5. CREDIT INSURANCE
Credit insurance policies typically
include…
• A specific coverage limit established for
most customers based on that customer’s
financial strength and payment history
• Discretionary credit limits for your
customers with relatively small credit
limits
• Annual deductibles, and per loss
deductibles
• An annual cap on total claims the
insurance company will pay
• A clause indicating the insurance company
has the right to terminate coverage on any
covered debtor company
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6. CREDIT INSURANCE
The cost of credit insurance varies
based on a number of factors
including…
• The buyer's [the client's] historical bad
debt loss experience
• The perceived risk in the portfolio of
accounts the creditor has requested
coverage for
• The types of insurance coverage being
requested
• The size of the annual deductibles
• The size of the annual dollar cap on
total paid losses
• The policy exclusions
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7. MECHANICS LIENS
• A mechanics lien can be filed find
anyone who provides materials or
labor on a construction project
• These are sometimes referred to as
property liens, or construction liens
• Mechanics Liens are primarily
used in the construction industry to
ensure people who provide goods
and labor are paid
• Liens are used by contractors,
subcontractors and suppliers of
goods and labor
• The property owner receives a lien
release when payment is made
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8. PERSONAL GUARANTEES
• A creditor can request that a customer
or applicant sign a personal guarantee
at any time
• The best time to do so is in connection
with setting up the new account
• By signing a personal guarantee, the
guarantor guarantees the debts
incurred by the debtor company…
• Meaning that the guarantor has personal
liability for the debts of the of the
company
• From our perspective, the guarantee
should be including no dollar cap and
no time limit
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9. PERSONAL GUARANTEES
The benefits of personal guarantees
include…
• Having a personal guarantee reduces the
risk of a bad debt loss
• Signing a PG demonstrates commitment
on the part of the individual signing the
guarantee
• Signing a PG creates an ongoing
obligation on the part of the guarantor
irrespective of any change in their
relationship with the debtor company
• Having a guarantee makes it easier for the
creditor to obtain payment from the debtor
company
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10. INTER-CORPORATE GUARANTEES
• An inter-corporate guaranty is a contract in
which the guarantor becomes jointly liable
for the debt
• The guarantor company accepts an obligation to
pay the creditor company if the debtor fails to
do so
• There are various types of inter-corporate
guarantees, including…
• An upstream guarantee is when a subsidiary
guarantees the debt of its parent
• A downstream guarantee is when the parent
corporation guarantees the debts of its
subsidiary
• A cross-stream guarantee is when a corporation
guarantees the debt of an affiliate
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11. LETTERS OF CREDIT
At its most basic, a Letter of Credit is:
• A payment undertaking made by the issuing bank on behalf of a
buyer/applicant
• To pay a seller/beneficiary a specific amount of money
• Upon presentation of specified documents within specified time limits
• Provided that the documents conform to terms and conditions as described in
the letter of credit, and
• Provided that the documents are presented at a specified place
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12. LETTERS OF CREDIT
• Letters of Credit (L/C) substitute the
creditworthiness of a bank for that of the
buyer/customer
• The bank issuing the L/C is concerned
only to see that the documents conform
with the requirements in the L/C
• L/C are used primarily when the buyer
has an unacceptable or unsatisfactory
credit history or credit rating
• A L/C helps assure that the seller receives
payment for goods delivered…
• Provided that the seller complies with
certain terms and conditions
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13. PLEDGES OF COLLATERAL
• Some creditors try to obtain a security
interest in assets of debtor companies
• Any creditor company can in theory become
a secured creditor
• To become a secured creditor, the debtor
company needs to sign a Security Agreement
• A Security Agreement is a contract that
grants security to the creditor in asset(s) of
the debtor
• This Agreement describes in detail what
assets are being offered (pledged) to the
creditor company
• To “perfect” that pledge of assets as
collateral, there are certain documentation
requirements mandated in the UCC
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14. FACTORING OF ACCOUNTS RECEIVABLE
• Factoring of A/R is a process by which a financial institution (a factor) buys a
creditor’s A/R at a discount
• Factoring provide sellers/creditors with a quick source of cash in addition to
reducing the risk of non-payment and payment delays
• A/R can be purchased with or without recourse
• Factoring with recourse means that if the factor is unable to collect from the
debtor, the creditor/seller must repay the money advanced
• Factoring without recourse means that the factor accepts the risk that the A/R
may be uncollectable
• When factoring is done without recourse, not surprisingly the creditor company
receives a lesser amount
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15. PERSPECTIVES ON PAYMENT DELINQUENCIES
To better manage the risk of slow payment,
remember…
• The more flexibility you demonstrate with
delinquent customers, the wider you open the
door to ongoing abuse of your payment terms
• You must be certain our customer knows what
you expect and when
• Don’t keep credit holds a secret
• You should never re-renegotiate a payment
plan
• In negotiations, remember that customers and
creditors are business partners with fairly
equal bargaining power
• Use the two and up rule when calling for
payment
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16. PERSPECTIVES ON PAYMENT DELINQUENCIES
• Past payment performance (good or bad) is
not a perfect predictor of future payment
behavior
• Calling delinquent debtors is far more
effective than corresponding
• Never be arrogant when you call, but always
be confident
• Remember that your goal is to negotiate a
reasonable and realistic payment
commitment
• Always start the discussion by asking for
immediate payment in full of the entire
past due balance
• Refer all uncollectable balances owed to a
third-party commercial collection agency
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17. PERSPECTIVES ON PAYMENT DELINQUENCIES
• Speak with decision-makers, not people with
no decision-making authority when it comes
to payments
• If a payment commitment is broken, before
discussing the next commitment, find out
why the last one was broken
• Reduce or eliminate grace periods before
calling delinquent debtors
• Always (always) confirm customer payment
commitments in writing via email
• Keep careful notes about what payment
promises were made, and by whom
• Be sure you have an effective mechanism to
follow up to make sure that customers do not
break their payment promises to you
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18. PERSPECTIVES ON PAYMENT DELINQUENCIES
And saving the best delinquency
management tip for last…
• Call delinquent customers
ASAP once they become
delinquent and call customers
in descending $ value based on
the size of the delinquent
balance
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19. ABOUT THE PRESENTER
Michael Dennis, is a partner in DC Associates, a consulting
company specializing in helping companies
manage risk and improve collections and
cash flow.
Michael Dennis can be reached at 949-267-8059

20. Questions
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