Benefits in bulk: setting up a wholesale business for growth

Anyone who enjoys driving the open road will know that the most essential skill for highway driving is the ability to anticipate. You need to look as far down the road as possible to give yourself plenty of time to react to what’s coming. 

To me, that is the perfect analogy for trade credit insurance. It’s like you’re driving down the highway when you get a call from your insurer warning you that there’s a six-car pile-up ahead, enabling you to take appropriate action. In other words, trade credit insurance is about getting information on potential and current customers well in advance, to let you know if giving credit will lead to trouble down the road.  It also warns you when a good customer may be struggling and their risk profile has changed.

Offering this type of advice takes specialised sector and market knowledge. Take the world of wholesalers, who also go by many other names, such as distributors, importers, exporters or jobbers. Whether they’re selling metals, televisions or seafood, wholesalers face challenges and have needs that differ from those of other industries. Especially in a time of supply chain issues and rapidly rising prices, it’s important to be aware of each of these challenges and know how to tackle them.

Consumer spending has recovered well from the pandemic, and the wholesale business is, as a result, buoyant. Opportunities abound, but they come with a certain level of risk that could, in one way or another, hinder a company’s growth agenda. One way to mitigate this risk and increase opportunities for future growth is to partner with a trade credit insurer that knows your market and can offer appropriate advice and protection. These are the five key areas that trade credit insurance can help with:

The added protection offered by trade credit insurance enables a wholesaler to extend credit more generously. This could include higher limits, longer terms, or less restrictive rules about personal guarantees. It is an effective way to stand out in the industry, as it offers a competitive advantage for both domestic and international sales opportunities.

Indeed, wholesalers often have very thin margins, and even a slight impact on expenses can severely hurt their cash flow. For example, a $50,000 bad debt for a company with a 4% profit margin means they will have to generate $1,250,000 in additional sales to break even. This is a risk that is just not worth taking on alone, especially when margins are being impacted by rising and unpredictable prices. 

Cash flow is particularly important for wholesalers, because their working capital is tied up in inventory and receivables. They have to find ways to reduce their Day Sales Outstanding (DSO), or the average number of days it takes the company to convert credit sales into cash. A credit insurance policy can help reduce DSO by improving credit decisions on the front-end and ensuring that money owed from slow payments and customers in default gets paid.   

Trade credit insurance also affects a company’s ability to borrow. Receivables are a big chunk of the collateral that a bank would be willing to loan against, and insuring them increases their value so a company can borrow more. With their largest assets guaranteed, companies can bolster working capital availability and invest for growth using additional funding.  In the pandemic era of rising prices and extended delivery times, more working capital is needed even by companies with previously strong liquidity.

Outsourcing analysis of your customers’ creditworthiness means you can keep your credit department as lean as possible, minimising expenses. This also frees up your teams’ focus on developing customer relationships and growing the business. New sales opportunities means new customers that can add unforeseen risks. Having the backing of external analysts gives your credit team the power to say yes to customers that make sense and be more careful when caution is warranted. 

As a global trade credit insurer, Allianz Trade has the experience, global vision and human knowledge to understand each of its clients’ unique issues. Advice that is tailored to your specific sector is the best way to build the business steadily, safely and sustainably.