Elliot Avison, Dancerace:  Hello, and welcome to back to another episode of The Ledger, bringing you conversations on lending, finance, and technology in the industry. 

I’m your host Elliot Avison, CEO of Dancerace. In this latest episode, I’m joined by Flemming Bengtsen, CEO of Nimbla. Nimbla have built a digital trade credit insurance platform, and we’ve recently started integrating their services into our own operating platform here at Dancerace.

With an unprecedented number of companies in distress and insolvency set to rise sharply across the globe, trade credit insurance has never been more in focus among lenders and clients. 

In our discussion, Flemming and I cover everything from butter biscuits, to COVID’s contagious effects on all kinds of business. We tackle subjects such as the UK governments trade credit insurance scheme, the rise of fraud and the future of the trade credit insurance market, including the use of new captive products. 

We hope you enjoy.

EA:  Would you mind giving us a bit of a background on yourself and Nimbla?

Flemming Bengtsen, Nimbla:  Yes, sure. My background is a financial services background and focused very much on risk. I was very much on the capital markets side of things, so I worked on dealing for trading desk risk but worked on many, many multiple variants of risk, be that credit risk, market risk, operational risk and for banks, for hedge funds, for a large clearing house. 

That came to a head nearly five years ago now when I'd almost had enough of all the governance and that big corporate side of things and I wanted to be able to go home and tell my kids what I did and not have to explain what Steerco was or why I had to take everything through a million different committees. 

I guess the other element to my background is that my father was an entrepreneur and he was a Dane, hence the name and his business was food wholesale. So, he imported herrings and Danish butter cookies, if you remember them, and crispy fried onions and distributed them to supermarkets and big multiples but also to cash and carries and so on and so forth.

One of his great bugbears was actually trade credit. It was either, 'Why should I take a risk on this cash and carry that might not be there next month?' or, it was, 'Why are the big multiples using me as a bank?' So, it was one of those things I'd grown up with. 

Then I threw myself into the startup world about 5 years ago wanting to understand the Fintech scene better. I landed at a platform that wanted to be a market finance for Europe.  They wanted to do receivables finance, to do invoice finance in particular and in doing so, I stumbled across credit insurance and I thought, what a great product but then when I dug into it I thought, what an incredibly antiquated product. It just felt like it was in the Dark Ages and it was in need of a refresh. That's really where Nimbla was born. 

EA:  Within Nimbla, are you the technical brain or business brain?

FB:  It depends who you ask. As a founder, you have to wear many hats. Early on, it was very much the fact that I was writing risk modelling. As you grow as a company, that's very much where I have to let go and let that be a function of the company that lives and breathes without me because they can't have me interfering in it.

CEO is always a big title, especially if you're a small company. It's a bit of a fad in startups and it feels a bit much sometimes but I guess the point really is that you start off as the jack of all trades and you're doing everything from cleaning the toilets to being up on stage and presenting. 

As we have grown into a reasonable sized organisation, we’re 18 people now, I am more in the place of leadership and steering the company where it needs to be. The key man risk of me not being there to make sure the models work and all the rest of it, it disappears. It has to disappear and now it's very much about steering Nimbla into the next chapter. 

EA:  Can you share with the listeners what Nimbla's mission is?

FB:  It is a big question and often with startups, you have to keep coming back to the core value proposition and what you do and what you're trying to do because there are so many things you can be. You don't want to be all things to all men but effectively what we are is we're the next generation of trade credit insurance.

By that, what I mean is we look at things on a transactional level. We look at individual invoices and what that means is we're very granular about what we do and that means we are data driven. So, we're a data-oriented business first of all. 

What we're aiming to do is to be the way that you can price the risk on a receivable. So, an invoice, and you can transfer that risk.  It's about having a digital trade credit insurance product. A fully digital trade credit insurance product that means you can price any invoice or any batch of invoices or an entire book or any cuts you want.

The clue is in the name, we can be agile, we are Nimbla. That allows you to transfer that risk as you see fit, whether it be a single invoice, just one receivable, a whole book, part of the book or whatever you want. It's that granularity that allows you to have the flexibility within your business.

That's really where we hope that plugging into your (TC 00.10.00) platform, your customers will be able to manage credit insurance through your platform and different aspects of that.  

One of the things I found really baffling when I looked at credit insurance was the amount of admin that's required to service a credit insurance policy. When I look at your platform I think all of the pieces are in place there for you to be able to service it so why would you have to go to a separate place to service and manage those policies when it's all readily there in your platform.

EA:  If you can get insurance on the riskier debt in a cost effective, this has a massive benefit to lenders and borrowers, which segues me onto the current situation.

FB:  Pricing is always going to be a challenge in a systemic event. It's a very interesting time and as with everything these days, every crisis is accompanied by a government response. 

We've had a few now and the government has come back with a reinsurance scheme which I think is a tremendously good thing but we are beholden to the carriers. We have carriers that sit behind us. We are a startup. We don't have our own balance sheet to lend, regulatory capital to write risks against so we have to borrow someone else's. They are understandably pretty concerned but the pricing, it is dynamic.

That is the other thing that's really important about what we do. We can't offer full transparency, we can't say there's a problem with this customer or this debtor, but what we hope we can do is to say if the risk changes up or down, you get that information through our pricing in real time. 

What that means is that we don't want to pull cover, that's the fundamental piece of what we're about. We want to write those risks on some of the riskier names as well. We want the good names as well but we don't want to sell you something that we're going to take away in a month's time because, fundamentally, that's another problem that a lot of customers have with credit insurance. You're sold a policy; you're sold limits and then something happens and those limits are taken away and what did you pay for? 

The pandemic has introduced a lot of interesting things. I'll be careful about what I say but there are a lot of companies out there that were on a knife edge anyway and they were perhaps business models that were outdated. 

You always need a bit of a shake up to get rid of some of the companies that are not functioning so well and a lot of those unfortunately will not survive. I think there are a lot of companies that don't deserve to go under because there was nothing they could do about this and, hopefully, they're going to be the ones that are going to be saved. 

Everyone's going to have to adapt, everyone's going to have to adjust and that change is probably going to be a good thing. Hopefully, it will bring things into a new age of disruption. We're looking at a completely different model of the economy going forward. It's going to be very interesting but it's also going to have a lot of casualties, unfortunately. 

EA:  Have you spent much time thinking how different things would be if something like trade credit insurance was in place more universally before this pandemic?

FB:  Yes, I probably think about it a little bit too much. If we wind back to 2008, we had a credit crisis that was a challenge to the monetary system and to banking in particular, it was an issue of counter party credit risk within the banks.

I was fortunate enough to work at LCH SwapClear, the London clearing house. It's not particularly well known but the London clearing house and clearing as a concept saved an enormous amount of pain that could have happened because of the Lehman's. 

The reason for that was it absorbed these incredible losses and they were allowed to net things across on an aggregate basis such that it didn't have a domino effect and knock other banks over. It would have done without that institution in place. Effectively, it's a buffer. It's a systemic risk buffer.

One of the dreams that I've always had is that you would ultimately have an invoice clearing house in a similar way which would work in a similar way for trade credit. 

We are facing a very similar problem currently, you can end up knocking over perfectly good, solid businesses through them having their customers default on them because they are in a weakened position right now because they've had however many months of no revenue, having to continue paying their staff no matter whether furlough or not furlough. But, also a lot of companies again that are very well run, are good businesses, must take on CBILS.

What that means is they're more leveraged than they were. It's still debt, let's not forget. That means that they're more fragile. If we have a second wave, not just of the pandemic, but another event and that could knock over more companies and that will end up knocking many more.

So, in answer to your question, I do believe it would make sense (TC 00.20.00) to have a mandate in many regards for companies to have credit insurance in place. That mandate was put in the banking world post Lehman's for derivatives. Now, that might be a harsh thing to impose on small businesses. It might be an expensive thing to impose but I do think the availability of credit insurance is one of those unseen, unsexy things that does actually add an extra layer of protection in these sorts of systemic events. 

So, in short, yes, of course. Obviously, I have a vested interest, but I do think that it's overlooked as a tool to help prevent contagion within the business sector in terms of risk. 

EA:  Do you see any other key challenges that receivable lenders are facing that aren't related to credit insurance?

FB:  Fraud. Probably the big one that I hear lots of stories of the incidents of fraud going up which, again, happen in the last crisis.

When you see a slug of government money coming into the economy, you often see standards lapse and I've heard stories from some, true or not, of companies that have got three CBILS loans of £50k each through three dormant companies. if that is going on, I think that's going to come back and bite a lot of people very hard in the future. 

Of course, receivables finance in particular does have challenges in that area. Fresh air invoices, double dipping, as I like to call it. There's a ton of different things that will come out and the money will bring the fraudsters. 

There's also the slightly sadder version of that fraud story which is where there are businesses that are on a knife edge. They're under a huge amount of pressure. I think there's a triangle and I wish I could remember it, but you have to have the ability, you have to have the means to do it. There's pressure on you to do it, personal or otherwise and those incidents will increase. 

So, I think fraud is a big piece of what's going to come out in the next 12 to 18 months. 

EA:  Can you give a bit more detail around the government trade credit insurance scheme?

FB:  For everybody's benefit, what is it first. It's going to be a backdated scheme that means that any policy issued post-April 1st will be included in a government reinsurance scheme. 

Should the insurers sign up to that scheme, they will have to give away a vast amount of their premium, if not all, to participate in that scheme. So, it's not going to be particularly profitable, in some cases it will probably be loss making for the insurers. But what it means is that the government will insure those policies. 

So, if the losses rack up then the government will step in. It means that the insurers are able to continue writing risks throughout this period because there was a real danger that the entire market could just withdraw because their own solvency could be called into question and it would be a more prudent move for the insurers to just stop writing any new business. 

Of course, that would have a negative effect on the economy in that a lot of businesses would rightly not want to do anything on trade credit and it works the opposite way around. 

Trade credit is in fact a catalyst, it increases the amount of business that gets done because of that effectively unsecured debt that goes out there. It's credit like any other and credit has a multiplier effect. It depends who you read and where you get your stats from, but I've heard that the multiplier effective is around 1.6/1.7. 

So,  do that in reverse and you could end up with what people refer to as a death spiral. Nobody wants to give trade credit, companies that need the trade credit don't have the working capital to purchase the goods and services they need to operate collapse and so on. Doom and gloom galore. So, the government scheme, which is not insubstantial at £10 billion, yet not all the insurers have signed up to it. I couldn't comment on why. The EU has a number of similar schemes in Europe which went ahead of the UK scheme and I'm very pleased to say that Bay's and the government stood up and got on with it and managed to get it through. 

I think it was a pretty painful process for some of those involved, as I'm sure all these things are, but it will fundamentally allow people to operate as normal as possible at least until the end of the year and then they will consider whether they want to extend it. 

EA:  Do you think then that this scheme will raise the profile for trade credit insurance and therefore make it a more understandable, recognised product for lenders to start offering to their customers?

FB:  I think it's a very valid point. One of the battles that we have is visibility and the awareness of the product. 

What we are appealing to, in our direct product and not via our integration into you, is a slightly higher-level integration, but a lot of our direct customers had never even heard of trade credit insurance before. Some had but there is a severe reputational issue. 

I can give you a story. When I started to explore the idea, I was reading the traditional startup manuals and got to the bit about, 'Get out of the building' and I did exactly that. I walked down the road and I started talking to people in the rag trade in the East End, these clothes wholesalers that you see out in the East End. Almost without question the second I mentioned the product, they were quite literally pushing me out of the door. They were absolutely furious about the way they'd been treated by the insurers over the years and especially during the crisis. 

It comes back to that point that I made earlier; they had paid for these products. They had paid for these products and then when they needed them the most they weren't there. It's a very valid concern, right? 

That's certainly one piece and we really want to push that awareness of the product further to the customer base. That's a challenging thing to do but I think, especially when you look at it in conjunction with receivables finance and with lending, there's another very unspoken benefit to credit insurance which is if you are getting your working capital means through factoring or invoice finance, you are doing that because you need that money. If you can get it somewhere else, you probably would have done. You need that money. 

Now, if that debt then doesn't get paid and you still have to come up with that money, you have a double hole. If that is not credit insured, then you have a hole to fill over there and you still have to repay what you've borrowed.

I think that risk, being a lender and being concerned about that default, that's a risk on risk. You have the risk of the borrower but the risk of the receivable not getting paid means there's a greater risk of that knocking your borrower over again. 

Really, that's where I think the value of credit insurance really is and especially now. We talked about awareness of credit insurance but the awareness of receivables finance, that is also going to go up and that has also had a bit of a reputational issue around factoring.

EA:  There are institutions trying to solve problems for the end user and help businesses grow and avoid the risk. Our platforms together are one step towards that solution. You have to have that vision, I think.

FB:  I agree. The awareness is one thing but there's going to be two factors that come into play because of CBILS as well. 

People are not going to have access to any more traditional finance. If you've got CBILS, you're going to be leveraged as far as you can go in terms of a traditional lender, in terms of an overdraft and a loan. You will have to look at alternative finance in that respect and receivables finance will probably be the next port of call for many of these people. 

It's an opportunity to have another crack at it and rebrand receivables finance in a more positive light. I think it does have a lot of benefits and I think that it's up to us and our customers to push those benefits to SME's.

EA:  Where do you see trade credit insurance going in the next 3 years?

FB:  I guess having not come from that background, I have my own view which is just where we want it to go. I suspect other people will be better placed to comment on where they think the rest of the market is going to go. 

I see challenges in insurance, in how insurance is done and what we're squarely focused on is digital. We're not interested in anything that's written on paper, that would be going backwards. We're interested in stuff that is fully digital. 

Blockchain was all the rage a little while ago . Plenty of applications for that, especially within receivables finance and within supply chain. I'm happy for it to go that way, we're ready, but I don't think that it's necessarily the most important thing right now. 

I think that trade credit insurance has to evolve into solving slightly different problems.  We're working with a provider where we're discussing parametric solutions which will effectively address a cash flow gap which is ultimately what we're talking about. If you wind it back to first principles, there is one thing that makes small businesses go under and that's cash flow. What we are doing is providing a solution based on a cash flow shortage because of a debtor defaulting. 

You can also get late payment policies which works on a protracted default policy that pays out when that cash flow gets stopped. So that's all we're really talking about. A parametric solution means that you can pay out without having to file a claim and go through all of the antiquated pieces of traditional insurance. 

I think the only way you can do that is through something that is truly digital. That's where we want to go. We want to get to a point where we have data and integration and validation checks that are done in an automated fashion. The dream for us really is to say, that customer has gone insolvent, they're on your book, you're covered, your policy is digital, we know so within 3 or 4 days that money will be in your account or that customer hasn't paid, it's late payment, it's gone beyond a certain number of days or terms, that money goes into your account and so on.

That's where I think the future of it is going. It almost needs to get to that stage where we are so embedded in your infrastructure and your workflows that we know all of these things between. That will allow us to underwrite better. It will give you more transparency in terms of the price. It will give you a better price because there's less people involved, because people are the bit that costs money, anything that's not automated. That's the beauty of digital. 

So, that's where we want to go. I'm sure that other insurers will want to go in a similar direction, but I guess it does depend which end of the market you're talking about. If you're a traditional credit insurer, you're probably working with very large companies as well and that's a different kettle of fish. That's certainly where I see us going. 

EA:  Do you have anything on the horizon that's slightly different to your current offering that would be interesting to lenders of receivable finance?

FB:  One of the things we touched on right at the beginning was that we want to be able to offer lenders a better product and be more flexible. 

One of those areas is multi-carrier options so that you could have different carriers i.e. you could have different insurers that fulfilled different needs across your book. But we are also setting up a captive. A captive is like your own insurance company but it's a self-insurance and then within that captive, we have cells which would allow larger policy holders to run their own insurance book which, for me, is a fundamental part of insurance, allowing alignment of interest so that it works like a first loss policy, it's your own money in that first pot and if you don't draw down on all of that money, then you can reuse that the next year.

There are also tax benefits. That's one of the things we're hoping to introduce this year, in particular that doesn't work for our direct customers but I think it will definitely work for some of your customers for the lenders that are sitting on the Dancerace platform and in particular when we're talking about some of the policies that are harder to write at the moment and when you're talking about a market that's going to become quite tight. 

No matter how many government schemes there are, the insurers are going to want to limit the amount of exposure they have and often one of the frustrations that bigger clients have is not the insurers appetite for that particular name, it's that they've used up their appetite. It's that the client didn't get that appetite, it's gone somewhere else. A company would normally get half a million, a million but sorry, it's all sold out and that's the same across the market. 

This is a solution that would allow you to take that risk yourself with a first loss provision and then we put a reinsurance piece in place. So, it is quite complex, it is something that's perhaps a little way off for some customers but it's something that we'll be exploring over the next couple of months. 

EA:  I believe the captive from my perspective would give them the ability to use that business knowledge and insight without paying someone else to do it for them.

FB:  Just to finish off on that, the key thing there and it's where I think insurance is slightly broken. Insurance is an incredibly old business but what we're talking about is there's a reason for those borrowers to keep those losses to a minimum which is in the interest of themselves, it's in the interest of the insurers, it's in the interest of everybody and it's only for these big blowout events that nobody sees coming, the outliers. That's what insurance should be for. It shouldn't be a hedge; we don't have to worry about losses in terms of the debtor book because we've got it in place. 

That's never going to work, but if you have a position where you’re paying £200-300,000 a year for your credit insurance and then you only have a loss of £50k a year on average, you can very quickly do the maths and decide you should just have your own little reserve fund. 

That's really what this is but it's much more tax efficient and it still gives you that 1 in 20 event that blows out completely beyond everything, you still get that protection.

EA:  Is there anything else you feel would be important to share with lenders?

FB:  This is on us, this is our brand and something we're trying to change a little bit, we made a name for ourselves as single invoice insurance. 

I'd just like to say that we don't just do single invoice insurance, we do whole book. We can do your whole work. 

We do it in a slightly different way and we hope it's more dynamic and that's an important message that I think we haven't really pushed as hard as we should and that we can be competitive with traditional whole turnover policies. 

EA:  I hope you enjoyed my conversation with Flemming from Nimbla. If you did, please subscribe to The ledger using your podcast player for more conversations about lending, finance and technology. 

If you’ve any questions about topics we covered on this month’s show, please please get in touch via info@dancerace.com. We’ll see you soon for another episode, stay well.