          
          
          
                INSURANCE CAN MINIMIZE YOUR BAD DEBT LOSSES
          
               How much are poor credit risks costing you each
          year?  There are ways to determine the tangible portion
          of this loss, through a cost analysis of your accounts
          receivable.  But there is no way, through an analysis
          of your accounts receivable, that you can determine the
          intangible losses that you may incur through poor
          credit risks.  Tangible losses can be measured in
          dollars when a retailer account defaults or goes
          insolvent.  This first and most obvious loss is the
          actual dollar loss of the goods that were sold.  The
          second loss is the profit that you expected to make
          from the sales.  The third cost is that of your
          collection efforts now that the account is in default. 
          The fourth cost is the decrease in the value of your
          accounts receivable as collateral, which will either
          decrease the amount of loan capital that is available
          to you, or increase the interest rate that you are
          charged because of this over-all lowering of your
          collateral value (or both).
               The intangible cost is much more difficult to
          determine, although it might be just as costly as the
          tangible cost:  It is the dollar volume of business
          that you lose through retailer accounts that you never
          obtain because they are classed as marginal credit
          risks.
               Much of the tangible cost of bad credit risks can
          be charged to your collection department.  And because
          your primary business is manufacturing or distributing
          merchandise, your collection department does not,
          unfortunately, operate as efficiently as, say your
          order department.
               Insurance companies are now recognizing that the
          inherent risk of maintaining an accounts receivable,
          which, because of the nature of the
          wholesale/manufacturing business, can run into
          considerable sums of money, is as much a casualty risk
          as the threat of property damage, or the liability of
          employee health and accident risks.  The insurance that
          is designed to fill this void that other casualty
          insurances do not is called commercial credit
          insurance.
               Commercial credit insurance is intended to
          indemnify the insured, who can only be a manufacturer,
          wholesaler, or distributor, for losses incurred when a
          retailer account fails to pay its credit obligations. 
          With this type of casualty insurance, you may recover a
          large portion of both your tangible and intangible
          costs of doing a credit business.  In essence, the
          insurance company serves two functions: (1) it acts,
          initially, as your collection agency, and (2) if it
          fails in the collection of the debt, it indemnifies
          you, the insured, in accordance with the terms of the
          policy.
               The usual commercial credit insurance policy is
          written with a deductible clause, which is based on the
          premise that an insurance company will only insure
          against unexpected or catastrophic losses, not those
          losses that are normal and expected.  In effect this
          means that the insured self-insures for the amount of
          normal and expected losses, thereby lowering his
          premium costs (if he doesn't elect the deductible, he
          simply ends up swapping dollars with the insurance
          company).  This deductible figure is initially
          expressed as a percentage of gross sales, and is based
          upon the bad debt loss of the average business firm in
          your business's classification.  The figure is then
          modified to reflect your own historical losses through
          bad debts, as well as any irregularities in the bad
          debt loss caused by businesses insolvencies  That might
          have been due to local, regional, or national economic
          recessions.  In any year, the insurance company will
          indemnify you only for amounts that are in excess of
          the deductible.
               The usual period of coverage for a commercial
          credit policy is one year, with no cancellation
          privilege for the insurance company.  The upper limit
          of coverage under the policy is determined by the
          insurance company through an analysis of your
          customer's credit ratings, which should show the loss
          risk of your accounts receivable.  Credit rating
          agencies of long standing, such as Dun & Bradstreet or
          TRW, are utilized to determine customers' credit
          ratings.
               As an example, if one of your customers had a Dun
          & Bradstreet credit rating of at least 3A1, you could
          extend this customer $100,000.00 of credit without
          prior approval of the insurance company.  If the
          customer's Dun & Bradstreet rating was BA1, you could
          extend him a maximum of $50,000.00 credit without prior
          approval by the insurance company.  If you adhere to
          the guidelines set by the insurance company, but your
          customer defaults on the debt, your insurance company
          will act as a collection agency, and if not successful,
          will indemnify you for the amount of the loss that is
          in excess of the deductible.
               The usual procedure for filing a bad debt loss
          claim is to file the claim within twenty days after
          learning of the debtor's insolvency, and before the
          expiration of the policy.  If the debt is past due, but
          the customer is not in fact insolvent, the insurance
          company will still process the claim as if he were
          insolvent.  Concurrently with filing the claim, you
          must turn the delinquent account over to the insurance
          company so that it can make an effort to collect the
          debt, and during the next sixty days, the insurance
          company acts as a collection agency for your business. 
          If it is successful in collecting the account, it will
          turn the proceeds of the collection over to you,
          including any amount that is in excess of your coverage
          (less collection charges).  Even in the case in which
          it is obvious that the bad debt loss exceeds the policy
          coverage, the insurance company will make an all-out
          effort to collect the total debt.  Failing collection,
          at the expiration of sixty days, the insurance company
          will indemnify you for the loss.
               We can see that the insurance company's most
          obvious function is to (1) recover the absolute dollar
          value of the merchandise, plus (2) recover any expected
          profit, thereby recovering your first and most obvious
          tangible losses.  Next, by using the collections
          facilities of the insurance company (which may be
          superior to your own), you eliminate your collection
          department with its attendant personnel costs,
          investigating costs, legal fees, as well as some of the
          uncertainties and unpleasantness inherent in operating
          a collection department.
               Moreover, your accounts receivable now offer more
          collateral security, because you are, in effect,
          providing a guarantee that its value will be maintained
          while you are repaying the loan.  This should result in
          a better credit rating for your business, which should
          strengthen your position in the money market.  This is
          implemented by a special bank endorsement, which may be
          attached to the commercial credit policy (this
          endorsement enables the lending institution to choose
          to receive indemnification directly from the insurance
          company, rather than waiting for reimbursement from
          you).
               Just as it is difficult to determine how much
          intangible loss that you may incur from bad debts, it
          is difficult to determine the exact amount that
          commercial credit insurance might save you in these
          intangible losses.  However, commercial credit
          insurance does enable you to extend credit to those
          marginal accounts that would otherwise be classed as
          too risky.  Of course, you must exercise a certain
          amount of discretion in doing this, even with the
          protection of insurance, as marginal accounts will
          lower the over-all credit rating of your accounts
          receivable, thereby raising either the deductible
          amount, or the premium cost of the insurance.  But,
          when these factors are weighed against the prospect of
          an increased dollar volume of business, you may elect
          to take on more marginal accounts.
               Commercial credit insurance is worthy of
          consideration, because losses incurred from bad debts
          are just as real as -- and in a broader sense, more
          far-reaching in their implications than -- losses from
          property damage or liability risks.
          
          
          
