North Santiam Lumber runs on a slim profit margin when it buys product from sawmills and sells to retail lumber yards.
To have just one of its customers not pay up would be a blow to this privately held, Columbus-based wholesaler of building material products.
Through inflation and deflation, operating with the right tools has kept North Santiam open for more than 30 years. Credit insurance is one of those tools; it protects the company’s annual sales of approximately $40 million and the jobs of 30 employees, says CFO Randy Miller.
“We deal with extremely small or tight margins and high volumes,” he says. “We’re not making a lot of money on any one sale. So if we have one customer default on their receivables, it could take us quite a while to recover from it.”
The amount of insurance North Santiam gets on each customer is based on the customer’s credit rating in either the Lumbermen’s Red Book, which lists lumber companies, or Dun & Bradstreet.
“The bigger the company and the better the credit rating, the more credit insurance we can get [on that client],” Miller says.
“We have several key accounts we sell more to and we list them for additional insurance,” he adds. “That does two things. Obviously we’re covered for that amount. And, if we don’t get coverage, then it’s a red flag that maybe we shouldn’t run their limit up as high as we want.”
In the three years Miller has been with North Santiam, there have been no claims on the policy carried through EULER American Credit Indemnity, but he knows there were some in the past. No specific incident prompted the company to pick up credit insurance, Miller adds.
“I think at one point in time, the bank requested they get this kind of insurance as protection for their receivables.”
North Santiam pays an amount per client it insures receivables on, so the total investment varies greatly. Policy coverage depends on what’s purchased. For instance, North Santiam could pay a premium that covers $50,000, but if the debtor owes $75,000, the policy would only pay $50,000.
If, instead, the debtor owes $30,000, a $50,000 policy would cover the $30,000 debt completely, but wouldn’t pay North Santiam more than what was owed.
The primary reason to buy credit insurance is to protect your business if you expand into a new market or sell to new customers, says Leah Comas, vice president of marketing for EULER American Credit Indemnity in Baltimore.
“We can work with companies of all different sizes,” she says. “But it’s probably not cost effective for you unless you have $3 [million] to $5 million in sales.”
“Any business could benefit from credit insurance,” Miller says. “You just have to evaluate each company’s individual needs. We need it because of our high volume and low margin.”
Still, North Santiam does its best to encourage prompt payment by offering a cash discount for payment in 10 to 15 days, Miller says. The majority of its customers take the discount. When one doesn’t, North Santiam watches the accounts receivables vigilantly.
“Once it gets to be 30 days past due, we’re on them pretty quickly,” Miller says.
How to reach: EULER American Credit Indemnity, (410) 544-0861 or www.aci.eulergroup.com; North Santiam Lumber, 272-8111
Andria Segedy ([email protected]) is a free-lance writer for SBN.
