A large national money center bank, through their Asset Based Lending unit, had a borrower that had a major concentration (a $10 mil exposure on a $40 mil A/R portfolio) with a single buyer. After determining that single debtor credit insurance coverage was not available on the buyer, the borrower agreed to provide a greater spread of risk by including all their unquestioned buyers with exposures in excess of $1,000,000. Neither the lender nor the borrower saw any risk with these buyers, so they were added to the insured pool.
One of these unquestioned buyers ran up against its credit limit of $1,000,000 and agreed to pay their outstanding balance in order to receive fresh merchandise. The company’s check for $980,000 was deposited and new shipments were made. Within 48 hours the insured found out that the buyer had a falling out with its lender, a trustee had been appointed and all bank accounts were frozen.
The policyholder’s internal credit limit of $1,000,000, which was strictly monitored and enforced, now had an uncollectable balance of twice that. As this buyer was tossed in as “window dressing” the policyholder, working in close cooperation with the credit insurance company, took immediate action to exercise his right of repleven.
Due to the quick and decisive action taken by the seller and the credit insurance company, the recovery of product and the loss payment made the policyholder almost whole. The lender took most of the credit, as if it was not for his recommendation, the borrower would have suffered a loss that, while not enough to cripple the business, would have had cash flow implications that put the borrower in default of its lending agreement. Due to his recommendation, that banker has filled a bucket with goodwill and will have the trust of that business owner for a long time.
Sometimes it is not the risk that everyone is focusing on that will harm you as much as the ones that are not being paid much attention to that can jump up and bite you.