Imagine you are a pulse crop marketer selling peas in India.
Two importers are interested in buying your peas: one you have done business with before and the other is a new company.
The new company offers to pay more, but because you don’t know it and worry about the risk of not getting paid, you opt for the lower bid from the known buyer.
Kevin Sullivan, regional vice-president of Millennium Credit and Political Risk Insurance, said credit insurance could eliminate the risk of non payment and broaden the market for Canadian agriculture.
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Sullivan and Ron Witherspoon of Interactive Management Group are visiting with Canadian agricultural companies and farm groups to spread the word about credit insurance.
The value of a sale can be insured for a fee, which guarantees payment even if the buyer defaults, becomes insolvent or is unable to pay for some other political or financial crisis.
“We have talked to producer-owned processing facilities that are only selling to buyers who pay cash up front,” said Witherspoon.
“They admit they are turning away a lot of potential buyers and they were completely unaware of the potential to use credit insurance to help them expand their marketing opportunities and get a premium price.”
The best known provider of credit insurance is Export Development Canada, a federal crown corporation that provides innovative financing, insurance and risk management .
Sullivan said EDC does an excellent job, and its success has left few opportunities for private credit insurance providers.
However, with European and American economies stagnant, private credit insurance companies are looking for opportunities in Canada.
Canadians have tended to sell their production domestically or to the United States, partly because of the shared language and the lower risk of non payment. But credit insurance could give businesses confidence to cast their net wider.
“It gives them options to deal with processors and buyers in foreign countries … whom they can deal with directly. They then don’t have to pass on margin to some middle man,” Sullivan said.
But farmers and small processors have found the insurance costly.
That’s why Witherspoon and Sullivan are working to create a credit insurance trust to increase users and lower the cost.
“They will pay a small fee to be part of the trust and they benefit from economies of scale of, say, having 2,000 producers all aggregated into this one credit insurance program,” Sullivan said.
“By aggregating everything, the average price is much lower so any producer can come in and use it, plus the capacity available is significantly higher.”
Atradius Credit Insurance would be the lead insurer for the trust, but other insurers would also be involved.
Trust members would use an online tool to determine if insurers offer coverage on potential buyers and the cost of the coverage.
Sullivan said the early forecast of average coverage cost is about one half a percent of the total sale, or $5,000 on a $1 million sale.
Credit insurance provides side benefits in company financing, Witherspoon and Sullivan said.
A marketer without property or inventory has little collateral. Because of the risk of non payment, banks seeking collateral discount or reject accounts receivables.
However, covering the receivables with credit insurance makes them an AAA credit rating and eligible as collateral. This increases the marketer’s borrowing capacity.
Witherspoon said a farmer with operating financing must often sell some crop in the fall, when prices usually are the lowest, to make payments on the loan.
Credit insurance allows farmers to seek future delivery contracts at better prices and use the guaranteed payment to get financing to pay off the operating loan.
“It empowers producers,” Sullivan said.
