Cover for Bad Debt Losses
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1 Euler Hermes Deutschland Cover for Bad Debt Losses Information about Credit Insurance Credit Insurance 1
2 Euler Hermes Our knowledge serving your success Our knowledge serving your success this is our promise. Euler Hermes helps your company to do safe business with reliable partners all over the world. Our credit insurance, presented to you in this brochure, provides reliable protection for your company from bad debts due to the insolvency of one of your customers with information which can prevent losses before they happen and, if it comes to the crunch, by indemnifying you for your financial loss. This product comes to you from an experienced specialist with a proven track record spanning some 95 years as a partner for companies both large and small. Euler Hermes stands for reliable management of your outstandings all over the world. Insurance experts, credit specialists and state-of-the-art technology ensure that the edge we have in credit information is constantly growing. We are present in the most important countries all around the world with our own business units and associated companies. With the information we have on these markets and the companies which trade in them we can calculate the risks our clients face and provide the cover they need. Euler Hermes Deutschland, under the aegis of Allianz and as a legally independent branch of Euler Hermes S.A. in Germany, is not only specialized in all areas of credit management. Together with other products such as bonding and guarantees and fidelity insurance, we can provide companies with a consistent portfolio of cover for greater security. The hallmark of our approach is to generate the innovative power to create individual solutions out of solid tradition and continuity. We combine our global business model with local know-how, in Germany just as in our international companies. And everyone benefits: whether they are a small business or a multinational corporation with worldwide reach. 2
3 Your company a lender We are talking about millions and the future of your company There is a lot of money at stake German companies grant credit to their customers to the tune of some 400 billion euros every year by supplying goods and services without receiving immediate payment for them. This means that industry, commerce and the service sector advance to their customers an amount equal to the entire short-term credit lines granted by the banks! The problem: these outstanding debts are risk capital in the most literal meaning of the word. Because if the debtor becomes insolvent, the creditor is often left empty-handed. To see how often this happens, you only have to read the business papers - and big household names are involved as often as not. Suppliers and service providers of all types are left with unpaid invoices on their books but often also with considerable costs which they have already incurred for materials and work on the order they have already completed. That threatens their liquidity. So it is no surprise when many healthy companies are forced into knock- on insolvencies as a result of bad debts. Both light and shadow in 2015 The worst of the crisis with a steadily growing roster of company failures seems to be behind us, it is true. Following an easing of the economic situation in 2014, 2015 too looks set to end with a slight plus all told: the Euler Hermes experts expect a decline in global insolvencies of some 2 %. Nevertheless, there are great regional disparities, which should set the alarm bells ringing particularly for German exporters while the outlook at home is satisfactory: Germany will lie pretty close to the average in 2015 Euler Hermes expects insolvencies to be about 2 % down on 2014, but still at a high level. Since that still means some 24,000 company failures, with all the lost receivables and jobs that go with them, the inability of customers in Germany to pay remains a risk which has to be taken seriously. The situation in our German-speaking neighbours is not so good: In Austria (+ 3 %) and Switzerland (+ 5 %) significantly more companies will go to the wall than in Especially the strong Swiss Franken is already causing huge export problems for Swiss SMEs. France, Germany s main trading partner, similarly expects a slight decrease in corporate insolvencies ( 1 %), but there, too, the level will remain high. All in all, the Eurozone looks to be on course for recovery in 2015; Spain, till recently a crisis country, will probably top the insolvency index by a large margin ( 15 %). In contrast, there will be a dramatic increase (+ 30 %) in company failures in Russia, currently far from stability. This affects primarily the Eastern European market, German firms must reckon with a steep decline in turnover here. A similarly steep double-digit rise is on the cards for Turkey: 17 % more company failures are expected in 2015 on the Bosporus. For Morocco, too, the prognosis points to a high increase of 10 %. The poor forecast for Brazil (11 % more insolvencies in 2015) pulls down the entire sub-continent. The insolvency index for Latin America is forecast to rise by 9 % (2015) and 6 % (2016) to an all-time high. The risks for exporters remain high The number of corporate insolvencies in 7 out of 10 countries in the world is still above the pre-crisis level of And even though the German economy has stabilized, various geopolitical risks and unpredictable developments in many of our neighbours and major trading partners still remain high on the agenda. And not least the 24,000 company failures expected for 2015 in Germany show that the risk of bad debt losses at home and abroad remains a danger which should not be underestimated. 3
4 Beyond their own borders, German companies will face further problems in coping with the dangers: information on foreign business partners are not easy to come by and frequently also just as difficult to interpret. Foreign languages, legal systems and business customs, e. g. longer payment terms all these combine to increase the risks involved. Extra sales needed to offset a bad debt loss Bad debt losses through customer insolvency in TEUR Necessary extra sales in TEUR at a pre-tax percentage return on sales of 2% 4% 6% What can you do? Three things are particularly important in reducing bad debts for your company to a minimum: clear contracts with your customers consistent management of your outstanding debts with ongoing monitoring of customers creditworthiness and taking out commercial credit insurance with an integrated debt collection service just in case things do go wrong This brochure gives you in-depth information on all three of these points and good tips on what to do. So that the money you are owed is secure and your company actually gets what it has earned! 4
5 Contract wording and credit assessment A clearly worded contract is as good as cash when it comes to the crunch The first step on the path leading to a bad debt is always the contract of sale. Many suppliers only realize how good or bad the contract is when it comes to a dispute with the customer, e. g. when lack of precision in defining conditions of delivery and payment terms can be used by debtors to pay later or not at all. And it is so easy to avoid a lot of trouble at the outset by clear wording of the contract. 1. Fix the due date for payment unambiguously Stipulate the due date for payment quite clearly and always give the calendar date. This means that the customer if it is a company is automatically legally in arrears of payment from the expiry of the due date. This gives you as the supplier a legally valid claim to late interest. 3. Define clearly when set-off is possible To prevent your customer arbitrarily setting off your receivables against counterclaims you owe him, it is best to make it clear in the contract wording that only undisputed or legally valid counterclaims may be set off against the receivables due to you. This is an effective way to counter one of the favourite tricks used by debtors. 2. Do not forget to agree retention of title Before you deliver goods, be sure to agree all forms of retention of title in your contract of sale. In this way you can force your customer, if necessary by going to court, to return to you unpaid goods or the proceeds of goods they have sold on, mixed or processed. Be on the lookout here for clauses in your customer s Conditions of Purchase which may exclude the supplier s retention of title rights. 5
6 Credit assessment You should always know how well your customer is doing When customers suddenly fail to pay on time or at all, the company which suffers the loss could often have seen it coming a long time before if they had paid attention to the warning signals. Because there are many indicators which reveal in advance that a business partner is moving towards insolvency. Stringent credit management meaning the combination of internal analysis of weak points, information on customers financial strength and intensive customer contact can recognize these signals. And that makes it an effective instrument for warding off possible negative knock-on effects for your company. Be well-informed from the very start You should always check a customer s financial strength even before beginning a business relationship, so that you do not find yourself in the situation of having to limit the damage after the goods have been delivered. The results of such a check can often be surprising the big names are often not in such good shape as you might expect, for instance. This type of credit assessment check can be obtained easily and quickly by making a credit limit request to Euler Hermes Deutschland (shortened to Euler Hermes in the rest of the brochure). Or alternatively you can order a credit report from one of the classical business information agencies such as Bürgel. And finally, it is often best to talk directly to the customer: what is his view of his current business situation, who are his competitors? Stay on the ball It is just as vital to keep an eye on the business relationships you already have, since the economic situation of a company can change very quickly. With regular credit assessment checks you can find out why invoices are still unpaid in specific cases: is a good customer perhaps temporarily strapped for cash? Then you can offer to defer payment or let him pay in instalments. Or is he perhaps an unscrupulous debtor merely playing for time? If the insolvency administrator is knocking on your customer s door, it is high time to act, however. 6
7 When it comes to the crunch: a bad debt Bad debts: From the first warning signal to the final act Warning: In a dispute, an obstinate debtor will often try to play for time. Signs which should make you more careful There are clear warning signals which may point to the imminent insolvency of a customer. These include changing the method of payment when customers stop taking advantage of the discount for early payment you offer them a change of company bankers But unusual behaviour by your customers should also cause you to prick up your ears e. g. when important contact persons never seem to be available when you call or high prices are accepted without any protest. When there is a change in the structure of your customer, too changes of management at board level or of shareholders or when the company is split up into smaller units it is as well to take a closer look at what is going on. And if good employees leave the company in large numbers it is not a good sign either. It s cheaper to let the professionals chase up unpaid accounts If your customer really does fail to pay as agreed, you should not hesitate to send clearly-worded payment reminders. If the invoice still remains unpaid after this, you should immediately take further legal action. Your legal adviser can tell you what needs to be done here. But it does not have to get to this point: a professional collection service can manage to get bills paid long before this in cases where the creditor is often unsuccessful with his in-house collection efforts. The experts see an 80 % chance of successful collection for debts which are no older than 3 or 4 months. Despite this, many companies still have unsystematic dunning procedures or place a collection order when it is too late. And this although external help usually costs less than maintaining an internal credit department. 7
8 Euler Hermes clients have an especially easy time of it Due to these persuasive arguments for professional collection of trade receivables, we have integrated credit insurance and debt collection: with our Cover for Bad Debt Losses (more details on pp 9/10). All you need to do is to pass on your overdue accounts to the collection division of Euler Hermes Collections GmbH. We then take care of contacting your debtors and collecting the money, notify an insurance claim where necessary for you and check whether we can indemnify you for the loss. Please look at pp 15/16 of this brochure for further details of our collection service. Make full use of your security rights Even without any specific contractual agreement, every businessman e. g. when he repairs a valuable object can exercise a security right known as a possessory lien. Thus a workshop only needs to hand over a vehicle on which it has done repairs when the customer has paid its bill. It may even be entitled to sell the vehicle in order to realize the proceeds due to it. The last act plays out in court Unfortunately, it is often unavoidable to take late payers to court as a last resort. The quickest and cheapest way to do this is to file for a statutory payment order at your local district court. After only about two months, the supplier is entitled to send in the bailiff with an executory title. This contrasts with the six months or more which it normally takes to disprove your debtor s defences against paying your invoice in the case of a lawsuit for a payment order! Anyone familiar with the procedure does not even need the services of a lawyer to fill out the paperwork for sending the statutory payment order. And by the way: executing a judgement title can still pay off even when it appears at first sight that your debtor has no assets for instance you can get a garnishee order put on receivables he may be owed by third parties or on possible future tax rebates due to him. 8
9 The Euler Hermes credit insurance policy Cover for Bad Debt Losses: An investment which pays dividends! All too often, however, neither determined action to secure payment nor the support of the courts is successful: many thousands of companies every year realize too late that there is nothing to be got out of their customers. The most frequent reasons for incurring such bad debts and their consequences: The creditor has insufficient information about the financial strength of his business partner. Retention of title is not enough to protect from loss. If a company is undercapitalized, bad debt losses can be an immediate threat to its existence. Major insolvencies lead to knock-on consequences, e. g. for sub-contractors. When things have reached this point, a credit insurance policy is generally the only way out. It will give your company comprehensive protection against bad debt losses. On top of that it provides a valuable service to you by carrying out a specific check in advance on the customers you do business with. In this way you gain the knowledge which enables you to avoid a lot of problems before they arise. 9
10 And this is how Euler Hermes protects your receivables Our Cover for Bad Debt Losses policy protects you on three fronts: it prevents many potential bad debts by taking over the task of checking and monitoring your customers credit worthiness, it reduces the number of unpaid invoices through the integrated collection service and it indemnifies losses if a customer fails to pay even after all the precautions we have taken. What can you insure? In principle all receivables due for the supply of goods, including work and services. The risks for work in progress and sales of plant and equipment on long payment terms can also be insured. Cover for Bad Debt Losses also provides worldwide cover, with the exception of only a few countries. The preconditions for taking out a policy At the outset we analyse the risk portfolio and credit management procedures of your company together with you. The following points among others are relevant here: what sector are your customers active in? how high is the insurable turnover? what countries do you deliver to? what bad debt losses did you have in recent years? what are your payment terms with your customers? Early payment of claims safeguards your liquidity Your particular advantage: Euler Hermes will indemnify you when so-called Protracted Default occurs i. e. before court insolvency proceedings are opened on your debtor. Protracted default occurs if and when Euler Hermes Collections GmbH has not succeeded in collecting your insured receivables in full within an agreed period of your placing a collection order with them. Of course, Cover for Bad Debt Losses will also indemnify you in the following cases: when proceedings for insolvency are opened in respect of the assets of your customer or have been rejected for lack of sufficient assets, all the customer s creditors generally have agreed to a composition or other out-of-court settlement, the insolvency court has formally noted that a plan for the repayment of creditors in a personal insolvency has been accepted, or the execution of a judgement title has failed to satisfy the debt. 10
11 Knowing what is good for you: the credit assessment by Euler Hermes The most important factor in protecting yourself effectively from bad debt losses is knowing when doing business involves danger for you. The key indicator for this is your customer s creditworthiness. In the Euler Hermes Group we have our own independent specialist company which deals with collecting this information Euler Hermes Aktiengesellschaft. They are responsible for assessing the creditworthiness of credit-insured buyers and monitoring developments. This division of tasks allows us to achieve the optimum concentration of know-how and experience. Worldwide exchange of information payment experience of our clients bank status reports, reports from credit information agencies internet research own field staff and visits to check buyers sector and regional information services Euler Hermes Group worldwide information from buyers, annual reports collection agencies commercial register, statistics offices evaluation of creditworthiness Euler Hermes Infopool monitoring of creditworthiness credit limit decision credit limit reviewed on ongoing basis 11
12 Assessing creditworthiness Our credit specialists: Euler Hermes Aktiengesellschaft Our specialist credit analysts have access to information on more than 40 million companies in Germany and abroad. The sources are as strong as they are reliable: alongside our own databases they include leading business information agencies, banks, collection agencies, sector and country information services and our Euler Hermes group companies all around the world, which take care of evaluating and monitoring foreign companies. All this information is updated on an ongoing basis. Information gathered by our field staff, the results of research by regional experts on the spot as well as the payment experience of more than 20,000 of our policyholders all feed into this process. We know how good your customer is For every transaction you want to make, we check whether the amount of trade credit you want to grant is justifiable and that depends on how solvent your customer is. To check on this, we compile information from his entire business environment and evaluate financial statements and annual reports. Other suppliers payment experience with him and our own know-how are also factored in, and of course intensive ongoing observation of the market goes without saying. Analysis with systems using fuzzy logic For the electronic analysis of this data we use an expert system we developed ourselves based on fuzzy logic. This technology enables us to evaluate qualitative information such as payment experience or the track record of a company s management systematically and verifiably alongside hard facts and figures. This ability gives the Euler Hermes system a clear edge over the normal methods of credit analysis limited to the classical evaluation of balance sheets. 12
13 The Online Service Credit limits in seconds: Making credit limit requests via the Online System EOLIS Our clients want their requests for a credit limit answered immediately in most cases. The Euler Hermes Online Service is ideal here: 80 % of all requests on German buyers are decided in seconds via the Internet. Just as important: your data is not only on its way at high speed. Thanks to state-of-the-art IT security technology, it is also optimally protected from prying eyes. Fast and simple: that s how an online service should be EOLIS is user-friendly in the extreme: it fits into your PC environment without any need to install new systems. And the on-screen dialogue to take you through the menu means that you can make fast credit limit requests right from the start without having to waste time being trained in the use of the system you just key in the buyer data and the amount you want to deliver for. Then, if the check has a positive result, you get the credit decision promptly on screen or, if you wish, parallel via Secure . On the ball around the globe via Internet! The Euler Hermes Online Service is naturally a global player, too. You can log in to our system from any point around the world as a rule you will then get the information you want within seconds, just as in Germany. This is how EOLIS with its direct access to over 40 million international company addresses can give you simple and immediate credit decisions for your export business too. Online Support Once you have logged into our EOLIS system, just key in the data and you will get a credit decision, mostly within seconds. 13
14 Your online advantages at a glance As you can see, you can speed up and simplify your business transactions under Cover for Bad Debt Losses with our Online Service. Around the clock, it enables you to: Call up and update your customer lists in the buyer database Enter and change your customer numbers Notify overdue accounts, adverse information or claims Send messages See the current status of all your orders with Euler Hermes Aktiengesellschaft Make credit limit requests and get credit decisions You have a direct link to the Online Service of Euler Hermes Collections GmbH to place collection orders as well as to see the current status of your collection orders and the debtor account for each debtor Upload and download various types of information Credit decisions are electronically transmitted for automatic further processing in your own systems! You can find more information and a demo version of the Online Service at www. eulerhermes.de under Online Services. 14
15 Professional debt collection Professional management of your outstandings with our collection agency Time is money this old rule of business turns out to be as true as ever, particularly when liquidity is at stake: the later an invoice is paid, the later you can draw on these funds for investment or operative expenses. For further details please see our separate product information folder on the Collection Service The problem: payment behaviour has deteriorated markedly in recent years. For this reason it has become all the more important to have professional management of your outstandings to secure your cashflow. Competence which pays off for you And this is precisely where we provide professionally competent and ongoing support. From the collection of outstanding accounts to the optimization of your reminder pro cedures: we offer your company solutions tailored to your needs. Effective management of outstandings and successful collection of debts demand experience and sensitive handling. We have been collecting clients accounts successfully for decades. A large number of clients in industry, commerce and the service sector benefit from our knowhow. Use the services we provide in order to take the strain off your company s balance sheet without straining your relationship to your customer. Security which knows no borders: foreign collection Collection of debts is always local business. That is why Euler Hermes worldwide network of international companies with their high quality standards are an invaluable asset in doing international business: For decades we have been working together with cooperation partners all over the world experts familiar with the legal system and the local business customs in their country. And who make competent and determined use of all the channels open to them to realize your outstandings. Another plus in our collection without frontiers: the excellent international contacts of the Allianz Group. 15
16 Professional debt collection Your advantages when you work together with us: You are working together with a professional partner well known in the market and with an excellent reputation who will make debt collection practicable and profitable for you. You are delegating time- and cost-intensive procedures and difficult negotiations to a neutral, experienced third party. You are placing your trust in an international network which will represent your interests long-term both at home and abroad. We take care of all the administrative duties connected with collecting your debts and you benefit from this. Through short lines of communication, minimal cost and effort and continuous one-stop shopping. After indemnification of a loss, we will take recovery action for you at no extra cost. Fast and simple handling via our Online Service. 16
17 Our portfolio of services for you Euler Hermes: Strong product performance worldwide The Euler Hermes Group is your competent partner with a network of its own business units and associated companies in key locations all over the world. Through these we are able to offer our German and international clients an extensive package of high-performance debtor management services adapted to specific local needs. International service with the standards you trust This includes first and foremost cover for short and medium-term domestic and export business against the risk of customer insolvency, protection from losses through misappropriation of funds by your own staff and surety bonds and guarantees. Effective Cover against Fraud is provided by fidelity insurance. This protects companies from economic losses caused by a company s own employees, temporary workers, leased personnel or company officers through wilfully committed unlawful acts such as theft, embezzlement, fraud, misappropriation of funds or computer fraud. Besides the Cover for Bad Debt Losses policy described in this brochure, Euler Hermes offers the following products and services to underpin your company s financial security: 17
18 Our portfolio of services for you Euler Hermes Bonding Cover puts up surety bonds and guarantees for its clients contractual or legal liabilities towards their customers in Germany and abroad, comparable with the issuing of bank guarantees. This takes the pressure off your bank credit lines and frees up additional liquidity. You can find out all you need to know about your customer s financial strength before you decide to do business with him, from Euler Hermes Aktiengesellschaft. Our BoniCheck is a secure instrument which enables you to accurately assess the commercial risk to you from your customer or your supplier. Euler Hermes Collections GmbH specializes in the successful collection of overdue accounts in Germany and abroad. They take all the time-wasting, unpleasant and costly hassle of collecting the money due to you off your hands, thus simplifying your dunning procedures. The services they offer also include following up and collecting already litigated debts. As the go-between dealing with your debtor we do everything in our power to maintain your relationship with your customer. Our clients can check the current status and the success of collection activities at any time via the Online Service of Euler Hermes Collections GmbH. More and more, the rating of a company is the decisive factor in determining what conditions it gets from the banks, what payment terms are offered it by suppliers, what chances it has to attract investment. Euler Hermes Rating GmbH produces such comprehensive, neutral and independent ratings of a company s financial strength. Euler Hermes is present in more than 50 countries and is the Number 1 in the market in 20 of them Countries with own business units and associated companies Source: Euler Hermes, as per March
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20 Euler Hermes Deutschland Niederlassung der Euler Hermes SA Hamburg Address: Friedensallee Hamburg Phone +49 (0) 40/ Fax +49 (0) 40/ Your hotline for fast help and service: Euler Hermes CustomerService Phone +49 (0) 40/ Fax +49 (0) 40/ We are just around the corner from you: Berlin Phone +49 (0) 30/ Fax +49 (0) 30/ Bielefeld Phone +49 (0) 5 21/ Fax +49 (0) 5 21/ gs.bielefeld@eulerhermes.com Bremen Phone +49 (0) 4 21/ Fax +49 (0) 4 21/ gs.bremen@eulerhermes.com Cologne Phone +49 (0) 2 21/ Fax +49 (0) 2 21/ nl.koeln@eulerhermes.com Dortmund Phone +49 (0) 2 31/ Fax +49 (0) 2 31/ gs.dortmund@eulerhermes.com Frankfurt Phone +49 (0) 69/ Fax +49 (0) 69/ nl.frankfurt@eulerhermes.com Freiburg Phone +49 (0) 7 61/ Fax +49 (0) 7 61/ gs.freiburg@eulerhermes.com Hamburg Phone +49 (0) 40/ Fax +49 (0) 40/ nl.hamburg@eulerhermes.com Hanover Phone +49 (0) 5 11/ Fax +49 (0) 5 11/ gs.hannover@eulerhermes.com Leipzig Phone +49 (0) 3 41/ Fax +49 (0) 3 41/ gs.leipzig@eulerhermes.com Munich Phone +49 (0) 89/ Fax +49 (0) 89/ nl.muenchen@eulerhermes.com Nuremberg Phone +49 (0) 9 11/ Fax +49 (0) 9 11/ gs.nuernberg@eulerhermes.com Export Credit Guarantee of the Federal Republic of Germany Euler Hermes Aktiengesellschaft Postal address Hamburg, Germany Office address Gasstraße Hamburg, Germany Phone +49 (0) 40/ Fax +49 (0) 40/ info@exportkreditgarantien.de Berlin Liaison Office Friedrichstadt-Passagen Quartier 205 Friedrichstraße Berlin Phone +49 (0) 30/ Fax +49 (0) 30/ aga-berlin@exportkreditgarantien.de Stuttgart Phone +49 (0) 7 11/ Fax +49 (0) 7 11/ nl.stuttgart@eulerhermes.com /
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