Credit Insurance and Construction: What You Need to Know
Brokers require an intimate knowledge of the ins and outs of the industry
This is particularly necessary for construction clients.
Do you really understand their world? Any broker can offer property insurance and a liability program, but a great broker goes further. A great broker knows the financial position of a client and uses this knowledge to offer surety and credit insurance.
In Canada, the subtrades are often at a disadvantage when working on major projects because the owner or general contractor controls the purse strings. Delayed payments for work performed can cause critical financial strife to the contractor. The problem is so significant that subtrades have come together to form the National Trade Contractors Coalition of Canada (NTCCC), with chapters in most provinces, to address this unfair business practice. The goal of these groups is to pressure governments into passing legislation that would force prompt payment for work completed.
When cash flow is interrupted because an owner or general contractor doesn’t forward payments promptly, it has a negative effect on the entire operation of the subcontractor. Subtrades basically need money for two critical elements: materials and labour. When subcontractors are unable to pay their suppliers, the suppliers, in turn, refuse further credit—making it difficult for the subtrade to deliver on other projects, which further impacts cash flow. On the labour side, in provinces with a robust economy, workers will leave an employer if there’s any suggestion that work may be stopped or delayed while the cash flow problems are addressed.
Lines of credit also present issues to subcontractors. When progress payments are delayed, the subtrades often can’t leverage their accounts receivable against their line of credit, as banks impose a 30-day (sometimes a 60-day) limit. Past that, banks often don’t recognize the accounts as collectible.
But a great broker understands all these negative impacts and has a ready solution for their clients to consider: credit insurance. Credit insurance can help subtrades in more ways than just the payment of uncollectible accounts.
Contractors should never extend credit without a proper check. But a quick canvas of your clients will soon confirm the unhappy fact that most do. Many times they are so concerned with booking the work, they forget to ask the question: Will this owner actually be able to pay me?
I recently spent some time with a contractor who didn’t have credit insurance. He’d extended credit to a client by doing $500,000 worth of work; he was hav-ing serious trouble collecting and was 180 days into extended credit. This was impacting his own credit line and, meanwhile, his annual bonding review was coming up. (You and I know that accounts receivable past 30 days will hurt a person’s bonding capacity.)
Added to all that, the crunch will be felt in the contractor’s bottom line, and that outstanding $500,000 will have an impact on the contractor’s ability to take some profit out of his business this year. All of these problems could have been avoided with either the proper risk management advice or an actual credit insurance policy.
If the broker had placed credit insurance on this account, the subtrade would have had to have the correct business protocolin place before purchasing the insurance, as credit insurers will ensure that policyholders have the necessary business protocols in place to help keep them out of credit difficulty. The accounting office of the contractor would have been required to do a credit check and, based on that information, they would have understood how much credit they could extend to the customer. In the case of the contractor out $500,000, if he had had credit insurance, the work would either never have been done because the customer didn’t have adequate credit, or the insured would have been able to make a claim and get paid by the insurance company.
Many times they are so concerned with booking the work, they forget to ask the question: Will this owner actually be able to pay me?
I work with contractors that often work for private owners, and the contractors do anywhere from $100,000 to several million dollars worth of work. It seems like checking the owner’s credit history would be a standard rule, but more often than not it’s never even considered.
The credit insurance company, however, places rules and conditions to protect the contractor. Most underwriters will help the insured understand how to implement good procedures. They’ll help the insured decide how much credit should be extended at any one time, how much credit is extended to any one customer, and they’ll help establish protocols to ensure nothing is missed in the process. In my opinion, this advice is as great a benefit as the actual insurance policy.
Offering credit insurance can show your client that you’re well informed of their risks. One of its key benefits is that it allows your client to leverage all of his accounts receivable rather than just the current portion, all while his banker keeps his line of credit available when he needs it most.
A broker talking to a contractor that understands the flow of business—offering a solution to a real pain point—has a much better chance of getting a new client than a sales person who offers the same old program but at a better price. While credit insurance is not cheap, it’s a flow-through expense that the insured can pass on to his clients. Brokers provide a cost per job so the contractor can build it into the cost of any project—the same way the cost of bonding is passed on to the protected owner.
Are construction clients loyal to their existing brokers? Sort of, but not really. In my discussions with contractors, they all say similar things about switching brokers. If a new broker offers a better price, that’s not very interesting to most contractors. They hate the time it takes to make a change, and they know that their staff will have to spend hours getting the information up to date, checking values, going over details of coverage, et cetera. So savings in premium is often not enough to pay for the client’s time to make the change. Brokers have to offer something that will take care of a problem the client is having, and the broker must find a way to do it using the minimum amount of a client’s, and his or her staff ’s, time.
Now, sometimes you just get lucky and find a client who has recently had an unfortunate claims or broker experience, and is ready to make a change. Unfortunately that is the slowest way to grow your book of business. So you will have to find risk management strategies, value-added services and coverage strategies that will be helpful to prospective clients to capture their attention.
Risk management strategies can come in many forms, but I urge brokers to use what has been designed by the insurance companies. These strategies address real issues and can be branded to your brokerage—making you look smart in your prospect’s eyes. The programs cover a broad spectrum of businesses, and I encourage you to pick only one or two strategies that speak directly to your prospects’ issues, and not overwhelm them with everything that is available. Contractors would benefit from risk management tools, such as fleet management or tool box safety meetings, but they would be less interested in building maintenance than, say, an apartment owner would be.
When it comes to contractors, I believe credit risk management strategies are particularly valuable. The underwriters who provide accounts receivable insurance will ensure good risk management practices are in place. They will guide clients through the following steps:
1. Insist on a written credit policy for the contractor to have, regardless of whom he is thinking of extending credit to. This policy will identify limits to be offered, days allowed to collect accounts and the procedures to follow if the account isn’t current. It will ensure that the contractor’s staff can follow procedures without asking the boss. The procedures will require the contractor to create clear documents so that communication with clients can’t be challenged. For example, it will provide statements on the type of actions to be taken when a matter is turned over to a collection agency, or when work will be stopped because payment is late. And, of course, the policy will instruct staff to always do a credit application and credit check with a credit bureau.
2. How to do a credit check.
3. What to include in a credit application.
4. When to elevate a concern to management and/or the insurance company.
Virtually every contractor has been stung at one time with an uncollectible account and, as a result, he will listen to your offer. Brokers who can describe a risk management strategy that directly speaks to a concern of the client has a much better chance of closing the deal. So will contractors be loyal to their existing broker? If you simply offer a better price, then I am pretty sure they will maintain their loyalty to the incumbent. But if you offer a competitive price and solutions to their major problems, you’ll see your business in this sector grow.
Karen Rutherford is the president of International Accelerated Learning in Calgary. She was a successful insurance broker for 23 years and was a recipient of the Jean Charles d’Auteuil Award of Merit for her work on behalf of brokers in Canada.
Copyright 2014 Rogers Publishing Ltd. This article first appeared in the June 2014 edition of Canadian Insurance Top Broker magazine.