Utah Metal Works is a 'reverse wholesaler' of non-ferrousmetals destined for recycling. The company purchases metal mostlyfrom manufacturers, demolition companies, and constructionbusinesses in the Salt Lake City area. It grinds, chops, cuts, andsorts, then packages the recyclable metal in a way that prepares itfor direct melt.

The companies that buy this material range from small localfoundries to corporate giants halfway around the globe. A decadeago, Utah Metal Works accepted the risk that some of its tradereceivables might default. But as commodity prices rose and thebusiness expanded both domestically and abroad, the company turnedto trade credit insurance to protect itself in the event that acustomer fails to pay. Treasury & Risk satdown with Chris Lewon, co-owner and operator of Utah Metal Works,to discuss why credit insurance seemed like a good solution formitigating receivables risk in a commodity-based business.

T&R: Before you began insuringyour trade receivables, how did you manage credit risk?

Chris Lewon: In the 1990s, we used creditinsurance. Deductibles were very high and our insurer at the timewould only underwrite the largest companies, the companies we werenot very concerned about. It was hard to get coverage for customersthat were smaller than, say, Alcoa. And when we really looked atthe premium costs and the size of the deductibles, we realized therisk sharing wasn't worth what we were paying for it.

This was when commodity prices were on a lower cycle (whichwe're headed to again), and we decided at that juncture toself-insure. We had a bad-debt reserve that we funded. Typically,we would heavily fund it early in the fiscal year and take abad-debt expense. Then we'd keep our ear to the ground and watchwhat was happening with our exposure to certain customers. Thebiggest challenge of this approach was that our credit departmentwas limited in scope because having an extensive credit departmentwas not really in our wheelhouse. Essentially, we limped throughthe late '90s and early 2000s.

T&R: What led you to reconsidercredit insurance?

CL: Well, everything changed in themid-2000s when commodity prices took a huge run-up. The numberswent through the roof. And our typical sale, which is three truckloads of material, rose from $60,000 or $70,000 to $150,000 on anaverage cost basis. At around the same time, we learned thatpremiums and terms for accounts receivable insurance had improvedfrom where they were in the '90s. We had the ability to buy a 90-10policy where the insurance company would take on 90 percent of eachreceivable and we'd retain 10 percent as a co-insurance. Theinsurance was priced per $100 of sales. And all of our customerswould be eligible for coverage, not just the large globalbusinesses.

We decided to buy trade credit insurance from Euler Hermes,which basically meant they became our credit department. We couldhave hired a credit manager to do nothing but check customers'credit ratings, but instead we're getting a credit department witha lot more depth of expertise. Plus, we're getting insurance thatwill cover 90 percent of any loss on an insured receivable.

T&R: So, if someone applies forcredit with Utah Metal Works, how do you work with Euler Hermes tomake that decision?

CL: We use an online tool to requestcredit limits for our customers, and Euler Hermes responds with anamount for which we are covered based on the company's risk profileand ability to pay. When the answer comes back, somebody withinUtah Metal Works still has to look through that information. Andit's not a perfect world. Sometimes we question the decision, andsometimes Euler Hermes might not have enough information on thecompany because it's privately held or because it's not willing toshare certain financial information with a third party. In thosecases, we will often help get them the information they need.

T&R: How does it help for UtahMetal Works to get involved?

CL: When I talk to some of these folksthat we're trying to do business with, a lot of the time I can showthem that the credit limit request process is actually beneficialto them. We're not the only company they may want to do businesswith, so it's in their best interests to establish more credit forthemselves and to expand their credit ratings.

T&R: Do you ever extend credit toa customer that Euler Hermes has denied?

CL: We do still make credit decisions onour own. It's rare for us to offer credit completely unguarded, butwe sometimes go over the amount Euler Hermes has established as acredit line. That's generally when we either have a history withthat customer or have knowledge of others doing business with them.Even when we don't completely follow Euler Hermes' recommendations,it's helpful to have the comfort level of knowing they've donetheir risk assessment on the companies we're doing businesswith.

T&R: Has having credit insurancehelped your business grow faster over the past nine years?

CL: Forsure, particularly when the commodity markets took off. When thatstarted, we were really at a loss for how we could grow and do theamount of business we wanted to, without taking on an incredibleamount of risk. Fortunately, with this kind of insurance we cangrow in a fairly managed way. That's really the key to any rapidascension in sales—being able to justify that growth. It's great ifyou sell product, but if you're not also paid for it, it's all fornaught. In the 2009 financial crisis, our credit insurance policywith Euler Hermes helped keep our business stable.

T&R: Has it also made it easierto grow abroad?

CL: Once material is to a state where itcan be melted easily, it can travel farther distances to make it tothe best end consumer. Since 2000, China has been the 800-poundgorilla in our market; Chinese manufacturers are buying atremendous amount of material to make into new product. And now theup-and-comer that everyone is watching is India. We do a lot ofbusiness in both of those countries.

To answer your question, I don't know that credit insurance hasmade it easier to grow in China and India, but it's helped me sleepa little better at night knowing that as we expand, we're going tobe paid in a timely manner. We know we're protected in case one ofour customers faces an unexpected catastrophe, or if somethingchanges downstream that affects our customer in ways we couldn'thave anticipated.

T&R: Does credit insurance alsohelp with borrowing?

CL: Yes, definitely. We use lines ofcredit, and working with a credit insurer gives us a tool to showthat we are taking appropriate steps to manage the credit risk ofour customers. It puts our lender at ease to know that thisinsurance guarantees we'll get paid, which will help them get theirmoney back from us as well. That's a tremendous advantage. Teachinga banker what your business does, and what type of performance isreasonable to expect from your accounts receivable, takes a lot oftime. If you can just show them your receivables are insured, itgives them a tremendous amount of protection.

T&R: So it streamlines theprocess of getting a line of credit?

CL: It does. And as things change in themarket, it helps them maintain a comfort level in doing businesswith you. Borrowers' receivables represent a major risk thatlending institutions may not understand very well. Having creditinsurance can definitely help you get access to capital that mightotherwise have eluded you.