‘Sleep Insurance’ Helps With Bills

If you are losing sleep worrying about customers who owe you money, there is a solution other than sleeping pills.

Business credit insurance, or “sleep insurance,” as brokers call it, may be just what you need to rest easier.

European companies have long relied on credit insurance to protect their profits, but U.S. firms are just waking up to the benefits. Historically, credit insurance companies have deliberately kept a low profile, catering mainly to carpet and furniture manufacturers, apparel makers and lumber mills.

But today, brokers who specialize in this type of insurance are marketing the concept to all kinds of businesses willing to pay for protection against unpaid bills.

“A lot of little companies go out of business because someone doesn’t pay their bill,” said Jerry Glickman, an agent for American Credit Indemnity Co. in Los Angeles.

Credit insurance is really catastrophe insurance--protection against a huge loss. Ideal candidates are businesses that have at least $2 million a year in revenue and are heavily dependent on a few customers for most of their sales. Businesses with a broader customer base tend to have their risk exposure spread more evenly and may not need such insurance.

Insurance is just one strategy for guarding against credit problems. Experts say you should also learn to diagnose your firm’s credit health. If your accounts receivable are falling behind, get on top of the situation quickly. Remember that extending credit means you are investing your money in your customers, so don’t be afraid to ask new customers for financial statements and check out the credit references they provide.

Last year the country’s major credit insurance companies wrote about $100 million in premiums, covering about $60 billion in business transactions, according to James Gammino, senior vice president of marketing for Baltimore-based ACI.

With the economy still wobbly, Gammino said more small and medium-size companies are applying for coverage.

Although credit insurance is not designed to boost cash flow because it takes about 90 days to collect on a policy, this type of insurance has other benefits. Bankers love it. Why? Because when they lend you money, their interest is protected.

Brokers say your delinquent customers are also more apt to pay if an insurance company is watching them and reviewing their credit histories.

John Thomas, president of Griffin Printing & Lithograph Co. in Glendale, bought credit insurance when he revamped his credit and collections department a few years ago. The insurance and weekly help from a credit consultant are helping him sleep better.

“One area that was always foreign to us was credit and collections,” said Thomas, who commutes between Griffin’s Glendale and Sacramento printing plants. “After some bad debt losses caught us by surprise, we felt prevention was the only answer.”

At his banker’s suggestion, Thomas hired consultant Eric Shaw, founder of New York Credit in Marina del Rey, to serve as his part-time credit manager. Shaw works one day a week at Griffin, running credit checks on customers, prodding others into paying and keeping on top of accounts receivable.

“We really needed an objective source to help make the credit decisions,” Thomas said. “If somebody dangled a big order in front of us but it was a downright unacceptable risk, we used to say, ‘Look, it’s a big order.’ Now we see it as a potential loss.”

Shaw, who works with dozens of small businesses, said credit insurance is essential if you think your biggest customers could put you out of business.

“When you have big-dollar invoices from a few customers, you want to insure them,” Shaw said.

Lola Sacks, an independent credit insurance broker for LNS Insurance Services in Los Angeles, said the premiums generally run about one-half of 1% of sales for a small to mid-size firm. Larger firms can often negotiate more attractive rates.

Sacks got interested in credit insurance when she saw how it saved a former employer from going under. She was working for a rapidly growing toy company that was overextended and starved for cash. The credit insurance policy saved the company from collapse when a big customer failed to pay a $160,000 bill.

So where can you buy this kind of insurance coverage?

There are surprisingly few companies selling it. Sacks said six companies serve the U.S. market. Baltimore-based American Credit Indemnity Co., which is owned by Dun & Bradstreet, has a 100-year history in the business. Continental Insurance is based in Piscataway, N.J. Fidelity & Deposit Co. is also headquartered in Baltimore.

A. I. Global, a division of American International Underwriters, is based in New York and specializes in serving companies with sales of $100 million or more. Pan Financial U.S. Inc. is also based in New York.

Citibank’s Citicorp International Trade Indemnity Co. specializes in insuring exports, but Sacks said the company is moving into the domestic arena.