Lumber Wholesaler

Improving lender relationships

A $25 million lumber wholesaler had extreme concentration in their accounts receivable because they only had eight active accounts. The smallest of these customers had A/R balances in the low six-figure range, and the largest was in the low seven figure range.

The company’s bank was concerned about this concentration, and they required trade credit insurance to include their accounts receivables as collateral. The lumber company established a trade credit insurance policy that specifically named all of its buyers, providing the bank the comfort level it needed.

The bank increased the advance rate from 80% to 85%. The net result was that the lumber company could obtain an additional $400,000 in working capital because of their trade credit insurance coverage. The cost of the policy was $25,000, so the return on this investment was excellent, and the lumber company was able to use the additional cash to continue to fund its growth and expansion strategy.

Increase net working capital:

Banks usually limit what you can borrow against your receivables because of the perceived risk. But banks consider receivables insured by trade credit insurance as secured collateral.