How Can Agencies Protect Their Credit Risk?4 March, 2009
In the difficult economic times we are in, many agencies are becoming increasingly worried about the credit risk to their clients. A comprehensive credit insurance policy has always been one extremely common way by which agencies could manage their credit risk. However, the credit insurance market seems to be imploding and as a result many agencies are facing massive uninsured exposures to clients. So what can agencies do?
Well, there are a number of options that an Agency can explore to try and protect itself against either a totally uninsured credit exposure to an advertiser or a shortfall in insurance cover versus exposure. (By exposure, I mean, in relation to a client, the total of an Agency’s unpaid debts, plus the cost of advertising that has already appeared but has not been invoiced, plus the cost of bookings which cannot be cancelled without the Agency suffering a financial penalty).
Some of these are as follows:-
Pre-payment would involve the advertiser paying in advance for the cost of the advertising it wants the Agency to book. Unfortunately, many advertisers are strongly resistant to making pre-payments as they can tie up large amounts of cash for potentially substantial periods.
An Agency could seek a guarantee of the advertiser’s liability to it from for example the advertiser’s bank or any parent company of the advertiser. A bank guarantee is likely to be resisted by an advertiser given the expense involved in obtaining one. From an Agency’s perspective a parent company guarantee of the advertiser’s liability may not be acceptable, particularly if the credit insurer is casting doubts on the financial health of the advertiser’s whole group.
3. Improving Payment Terms
An Agency could change its model from monthly invoices on 30 or more day’s credit terms, to invoicing say on a weekly basis for the advertising that had appeared in that week and require payment more quickly than 30 days.
4. Changing Terms with Media Owners
The Agency could attempt to change its terms with a media owner so that it had a greater ability to cancel bookings without a cancellation charge being applied. If an Agency was able to cancel without penalty all bookings for advertising that had not appeared right up to the day before insertion/broadcast, this would enable it to substantially mitigate its credit risk. However, such a measure is likely to be strongly resisted by media owners.
5. Sharing the Risk with Clients
Agencies could consider risk sharing in relation to the uninsured exposure to a client. For example, if the client’s credit insurance limit was reduced to say £500,000 whereas the Agency’s exposure to that client remained at £1,000,000, the uninsured £500,000 could be shared between the client and the Agency as follows. The client pre- pays £250,000 to the Agency so that the uninsured exposure is reduced to £250,000 in return for which the Agency continues to allow the client normal credit terms and not cancel bookings already made and agrees to take £250,000 of the credit risk itself.
6. Setting up an Escrow Account
An Agency could set up an escrow account and ask a client to deposit funds in it. For example the amount deposited could be sufficient to cover the client’s uninsured exposure. The terms of the escrow account could provide that if the client became insolvent or if its invoices to the Agency were seriously overdue for payment, the amount in the escrow account would be paid over to the Agency to partially satisfy the client’s debt to the Agency.
Reviewed in 2015