Your Clients May Not Be Ready for a Liquidity Crunch, Are You?By Andrea Villar | Wed, 09/08/2021 - 05:00
Q: As a specialist in insurance, risk management and debt collection, how does Atradius’ business model adapt to the needs of the Mexican market?
A: Atradius is an international group headquartered in Madrid and Amsterdam. We operate in 45 countries and each country has very specific characteristics that make it impossible to have one model that applies everywhere. We have been operating in Mexico for 50 years.
Mexico is a unique country, but we can compare it to how we operate in The Netherlands. In The Netherlands, companies sell on credit and they ask if credit insurance is in place before even considering shipping the goods. It is very difficult to find companies that sell their products on credit without trade insurance. In Mexico, very few people are aware of the existence or benefits of trade insurance. While companies look for us in The Netherlands, in Mexico we have to be proactive in finding customers, explaining how credit insurance works and convincing them about its benefits.
The second big difference is that in The Netherlands, every company is obligated to publish its annual results in the public registry. In Mexico, this requirement does not exist and only companies listed on the stock exchange (BMV or BIVA) have the obligation to publish financial results. That represents a tiny part of the corporate world in Mexico. Even in the Netherlands, where information is publicly available, companies decide to insure the risk of nonpayment. In Mexico, where there is no such information available, companies still are quite reluctant to insure their receivables. We have to adapt our business model by being highly detailed in our activities, obtaining financial information about companies that really do not want to publish this. That has been probably our biggest challenge.
The third variable that is typical in Mexico is nonpayment due to insolvency. In The Netherlands, companies that do not pay are either bankrupt or have gone into receivership. In Mexico, companies just say they cannot pay you and claim protected default. Dealing with those issues and recovering the money in circumstances like that requires a completely different business approach than in other countries. You need to be much more involved in dialog and look for solutions, considering risk management and having an enormous emphasis on collection, which is what we do through an affiliated company, Mexico Atradius Collections.
Q: What are the next steps when a customer notifies you that they are no longer receiving payments?
A: If a company wants to sell water bottles on 60-day credit, it goes to Atradius, tells us who it wants to sell to, how much money the order is for, and the limit it wants covered. We then analyze the risk associated with the buyer to determine how much we can insure. Once this is done, if the buyer stops paying our client, there first is a period of 60 days, depending on the details of the policy, during which the client approaches the buyer directly to reach an agreement. After that time, the client notifies Atradius. We analyze the situation together with the client to determine the risk and depending on our conclusions, we may or may not give our client another 60 days to come to an agreement with its client. About 80 percent of these situations are solved by the client with our support. Usually, it is a matter of providing some time and being constructive to ensure a good relationship.
If this does not work, the client comes back and asks us to file the claim. When the client file the claim through Atradius Collections, one of two things can happen. Atradius Collections solves the problem before we lay the claim or it does not and we pay it. What does it mean when we pay a claim? It means that our insured client will receive the value of the insured order minus 10 to 15 percent of the amount of the invoice, depending on the level of coverage. As soon as we pay a claim, we flag the buyer with the credit bureau. Then, depending on the situation, our client may start legal action against the buyer.
The best route in our business is to avoid a claim because as soon as we pay, the client can no longer trade with the buyer. The relationship between the two companies is destroyed. Sometimes, the best solution is to set up a payment plan. However, sometimes our client needs the money om order to pay its suppliers or other creditors.
Q: Would it be beneficial to oblige companies to have trade credit insurance through regulation?
A: No, I think we need to do a better job of convincing companies why it makes sense to have trade credit insurance. A company might be selling to 250 clients but three represent 75 percent of their business. If one of the other 247 does not pay, it will cost some money but it will not put the business in jeopardy. However, if one of the main three cannot pay, then the client has a problem. We can insure just those three companies. There are also companies that only insure their export business because their domestic business does not have enough risk exposure to justify the investment.
Some businesses separate their sales into different sectors or industries. For example, a company that is selling glass to the automotive, construction and consumer industries can only insure the industry with the highest risk. This can be done; however, we do not endorse negative selection. This means we will not allow a company to choose, based on their judgment, between companies. We need to be very objective in the selection of risk. We will not just take the bad risk and leave the rest uninsured.
Q: How has the COVID-19 crisis affected your business, and which lessons have you learned and implemented?
A: The inferno was on its way and we expected the year to be an absolute disaster, it felt like we were going back to the Great Depression. Everybody said the 2008 crisis was peanuts compared to this, and we thought it would be a terrible year for Atradius. Of course, it was not a good year but we still achieved a positive result last year.
Internally, we learned from our mistakes from 2009. Back then, when the crisis started, we just cut limits left and right and sent clients notes saying, “As of next Monday, these 50 limits that you have are no longer valid; we are canceling them all.” That was dumb because that is not the way to help your clients through a crisis. Moreover, since we were not supporting our clients, they were not able to support theirs either. That was a big mistake at the time and, therefore, we received claims from customers who stopped receiving payments.
We did not do that this year. We had much better control of our risk portfolio than we had back in 2009 and we were much closer to our clients. We tripled our service level in terms of communication with clients, finding out what they needed, helping them get through the difficult situation and asking them to let us reduce risk where they did not need the limits.
During the first months of the pandemic in Mexico, nobody paid their bills and we saw an uptake in overdue payment notifications. Companies did not know what was going to happen and decided to stick to their cash as much as they could. As of June 2020, companies started paying and the economy partly reopened. Banks gave their borrowers an extension to pay by the end of the year or early 2021. This was fantastic as companies started paying their suppliers, which was another reason why we did not pay as many claims as we thought would need to when the pandemic hit.
The situation is changing in 2021. Banks are starting to collect and are no longer giving extensions. What we expect to see this year is that banks are going to take an enormous amount of liquidity out of the market. That will seriously affect the ability of companies to pay employees but especially their suppliers. There are dark clouds on the horizon. Large companies are prepared for this liquidity crunch but SMEs are typically not well prepared because many operate on a day-to-day basis. Given the current circumstances, we could call 2021 a good year for Atradius if we make money and are able to add 40 to 50 good new clients to our client portfolio.
Atradius specializes in trade credit insurance and debt collection. The company is present in 54 countries and has a retention rate of 93 percent