While credit remains extremely tight, the economy is showing signs of recovery:
* The stock market has broken through the 10,000 mark.
* Housing prices have bottomed out.
* Orders for durable goods are inching up.
But instead of sighing relief, processors should be more vigilant than ever.
History has proven that the initial stage of recovery is the most dangerous. Just when things start looking up is when many customers that have somehow managed to survive suddenly fail.
It was true after the first oil shock of 1973, the second oil shock of 1982, the recession of 1992, the dot-com bust and 9/11.
History has a way of repeating itself.
Many of your customers who [have] survived the current crisis are stretching their capital to the breaking point on new parts, inventory and staff. Many of them, thinking the end is in sight, may be taking big risks. But your customers' risks should not become your risks.
Just one default by one big customer could take your company down. It happens every day. Indeed, we've seen some spectacular examples of late.
So what can you do to protect your company in this difficult period while not hindering recovery or alienating customers?
Do what businesses have done for hundreds of years: Transfer the risk.
For plastics processors there are two preferred methods.
By far the most popular method is to buy credit insurance to insure your accounts receivables. If customer defaults or goes bankrupt, you still get your money.
Nearly half of all plastics processors in Europe use credit insurance. Now the practice is growing in popularity in North America.
Premiums, which are surprisingly reasonable and can be passed along, are based on the type of business and the customer's credit history.
The other method for transferring risk is accounts receivable financing, also known as factoring.
Like credit insurance it is growing in popularity.
In accounts receivable financing, instead of insuring a customer's debt, you sell it to a bank at a small discount.
Instead of waiting for 30, 90 or 120 days, you get your money overnight. Instead of biting your nails, you can put your money to work immediately.
Both methods enable pro-cessors to remain on a pro- active footing during a dangerous period.
Indeed, many companies that have used credit insurance or accounts receivables financing though the economic crisis say they will continue to use them even when economy recovers, for in addition to transferring credit risk, they provide additional benefits.
For example, many companies have found that transferring risk is a good way to grow. You can approach new customers, move into new areas or offer better terms.
Using either method to transfer risk also improves your company's financial profile. With your accounts receivables assured, banks are much more willing to extend credit.
As the economy claws out of its slump, it's important that companies remain vigilant.
Now is not the time to take risks — especially your customers' risks.
Braun is executive vice president of Coface North America in East Windsor, N.J. The firm is the North American branch of Paris-based Coface, the credit insurer subsidiary of French corporate and investment bank Natixis.