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Political Risk Insurance Provided Relief When A Large Invoice Went Unpaid

Steady Cash Flow and Proactive Risk Strategy Helps Company Strategically Grow

In the often volatile apparel industry, a steady cash flow and proactive risk strategy are imperative for successful growth. On the advice of Marcum LLP, a CPA firm, San Francisco-based apparel company CP Shades implemented credit insurance as a comprehensive solution to mitigate risk and strategically grow sales.

Industry:

Apparel

Challenge:

Coverage for increased exposure with a key buyer

Policy Benefit:

Gain financial peace of mind

Challenge

As an apparel wholesaler and retailer, Sausalito, Calif.-based CP Shades has leveraged its reputation as a producer of quality garments that are sustainable and hand-made in northern California into impressive growth. Like many companies in the apparel industry, CP Shades sold a portion of its accounts receivable to a factor to accelerate cash flow and to cover a portion of receivables against loss. However, when one customer, for which there was limited financial information available, came to represent a significant percentage of CP Shades’ total revenue, the factor was unwilling to absorb the increased exposure.                                 

“CP Shades had a good customer that paid its bills on time and kept its word,” said Ron Friedman, CPA, a partner at Marcum LLP, the accounting firm working with CP Shades. “But since the customer didn’t provide financials, the factor wasn’t comfortable taking the risk for the entire amount of these receivables.” Without more support from the factor, CP Shades faced significant financial exposure if this customer was ever unable to pay its invoices.

Solution

CP Shades and Friedman worked together to identify the right solution for CP Shades’ unique needs. Friedman, who is experienced in helping his clients to structure effective credit risk management programs, turned to one of his key strategic partners, Euler Hermes, to structure a solution that would provide both overall credit insurance and specific additional coverage for CP Shades’ largest customer. 

CP Shades purchased credit insurance for its entire sales portfolio so that it could strategically expand its sales safely to new and existing customers. To address the very specific credit risk CP Shades’ largest customer represented, the company supplemented its general credit insurance with a specialized Euler Hermes product called Power CAP, which provides additional coverage for very large and higher-risk transactions. This additional coverage was necessary given the limited financial information available from that particular customer.

“Apparel companies are not interested in taking credit risk,” said Friedman. “Most receivables are covered through factors, and companies rely on factors for credit information on their customers and for adequate risk coverage.” When the factors themselves are less willing to take on certain risks, including customers that do not offer adequate financial information, these apparel companies must either find other options or struggle with potential fluctuations in cash flow that can negatively affect operations and growth.

“That’s where Euler Hermes comes in,” said Friedman. “Credit insurance can make up that shortfall and strengthen a company’s financial position by ensuring cash flow and balance sheet stability.” This, in turn, frees up company leaders to focus on the critical foundations of the business—designing, merchandising and selling products. 

Results

Having this credit insurance solution in place allowed CP Shades to address the risk of having such a large portion of sales tied up with a single customer. But credit insurance also supports the company’s plans for expansion. With limited resources available to assess customer financial information, CP Shades can now rely on Euler Hermes to work as an extension of its credit department by offering proprietary knowledge and risk monitoring in addition to financial protection. These resources give CP Shades the confidence necessary to significantly increase credit limits to help stimulate sales. “If companies in the apparel industry adopt credit insurance, that could allow the whole sector to expand and could be a real winner for everyone involved,” said Friedman.
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Steady Cash Flow and Proactive Risk Strategy Helps Company Strategically Grow