Through the latter half of the 1990s, safeguarding receivables against defaults, bad debts or non-payment seemed as far-fetched a notion to U.S. firms as shorting Yahoo! or Amazon.com stock. The sizzling economy and Dot-Com mania persuaded many businesses to abandon long-accepted risk criteria and throw caution to the wind. Those concerned enough about risk to take precautionary measures felt they were sufficiently protected by careful credit analysis and bank-issued letters of credit.

The events of the last 12 months, however, have served as a powerful wake-up call. The Internet meltdown and telecom crash, the year-long recession and the fallout from the Sept. 11 terrorist attacks combined to force a record 257 publicly traded U.S. companies--some of them investment-grade enterprises--into bankruptcy protection last year. In addition, the ongoing Enron debacle has shaken the public's confidence in the venerable institutions tasked with preserving the integrity of the nation's financial system.

U.S. businesses are operating in uncharted territory. Many weren't around during the 1990-91 recession, and until 2001 knew only boom times. And since Sept. 11, new and old firms alike have been buffeted not only by the worst terrorist attack on U.S. soil, but by such high-profile bankruptcies as Enron, Kmart and Global Crossing, just to name a few.

The U.S. economy now appears to be on the mend, yet companies punished by the tidal wave of bad news are taking no chances. Receivables protection is now a front-burner issue. Shipping on open account without adequate backstops is no longer an option. And "credit insurance," which is estimated to be owned by only 10 percent of U.S. companies, is getting a fresh look.

For decades, Euro-businesses have used credit insurance to minimize the risks of trading across multiple borders. By contrast, U.S. firms have long been content to trade just within the U.S., and became accustomed to doing business under the "one country, one currency" principle.

However, many of these companies are now being forced to look abroad for growth. In doing so, they confront a maze of often-incomprehensible international regulations, language and cultural barriers, and foreign buyers who may operate under a different set of principles. Few doubt the abundant business opportunities that lie beyond U.S. borders. But with those opportunities comes an increased level of risk.

To be sure, bank letters of credit are available to cushion the blow in the event of an international default. But L/Cs are costly to administer, burdensome to execute and often reflect risk factors deemed necessary by the issuing bank, not by the exporter.

So if U.S. firms have gotten risk religion and credit insurance is now in vogue, is there a cost-effective way to play the game?

One company that has joined the fray is well known in shipping circles but a new player in the insurance field: United Parcel Service. UPS' financial services unit, UPS Capital Corp., and UPSC's insurance arm, Glenlake Insurance Agency, has rolled out a "credit insurance" program. But it is a program with a twist: it is only targeting UPS shipping and logistics customers.

UPS' strategy is two-fold: First is to bundle a single-source solution for shipping and insurance; second is to leverage its core transportation and information capabilities to drive a more accurate analysis of a company's financial condition and its creditworthiness. This, in turn, would persuade UPS insurance partners--UPS markets but does not underwrite the policies--to write affordable coverage that aligns with the appropriate risk factors.

As UPS sees it, a shipping partner, unlike a traditional lending institution, has a daily, real-time window on the financial health of an enterprise. UPS believes that orders (or the lack of them) paint the most precise and current picture of a business' overall condition. In theory, this should lead to a superior evaluation of a transaction's credit risk. And it should help identify potential problems before they become bona fide disasters.

"Reliable forecasting is driven by access to timely and comprehensive data flows," says Mike Plourde, president, Glenlake Insurance. "UPS already manages the flow of product that collateralizes the cash flow, and we generate a mountain of information on virtually every transaction. If credit insurance underwriters base their risk-mitigation strategies on the flow of detailed, timely and relevant data, we believe UPS will have a major role to play in this business."

Plourde sees UPS' delivery infrastructure and robust database doing more than just supporting risk-mitigation activities, however. He believes UPS can use its resources to turn credit insurance into a lifeline of liquidity for small to mid-size firms starved for capital due to tighter standards for bank lending.

"The flow of capital to smaller companies has been severely restricted over the past 18 months," Plourde says. "However, since the extra protection through credit insurance translates into stronger and more predictable cash flows, lenders should be encouraged to offer borrowing capacity at attractive rates,"

Plourde added that by identifying areas of potential risk and limiting exposure to credit loss, "Credit Insurance" helps a business reduce or eliminate its need to maintain bad debt reserves. "Those savings drop right to the bottom line and free up cash for re-investment," he says.

Infobox: About Glenlake Insurance Agency

Glenlake Insurance Agency is a full service provider of financial and insurance solutions for the small business owner. As a subsidiary of UPS, Glenlake leverages over 90 years of experience connecting shippers with customers in order to offer fast, easy and flexible ways to increase cash flow, limit exposure to loss, and strengthen your credit position. Check out the WWW site at http://capital.ups.com/capital/glenlake/glinsurance.html.

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