Insight & Analysis

Credit where it’s due

Published: Sep 2018

While corporate insolvencies are leaving many suppliers with unpaid bills, the cost and availability of trade credit insurance cover has improved significantly in recent years.

Many of Britain’s high streets appear fated to be disfigured by more boarded-up store facades over the coming months. Over the past few days department store chain Debenhams has again attempted to reassure jittery investors that it can survive, amid rumours of mass store closures and the possibility it will enter a company voluntary arrangement (CVA).

The company previously insisted in July that it had a “healthy balance sheet and cash position” after it emerged that trade credit insurance providers had reduced their cover for Debenhams’ suppliers, although no carrier had withdrawn it completely.

The future of competitor House of Fraser is also uncertain. One month on from the deal, the company’s website is still inactive, despite last month’s rescue by Sports Direct chief Mike Ashley. The £90m acquisition was agreed hours after the chain went into administration with total debts of £884m, of which more than half was owed to over 1,000 of HoF’s suppliers. None are expected to receive their money from the company’s administrator EY.

The fragile state of two major store chains echoes of the collapse ten years ago of former high street stalwart Woolworths. The writing was on the wall for Woolies and its 815 stores once trade credit insurers announced they were no longer willing to provide cover for its suppliers, forcing the company to pay cash upfront when buying goods. The company succumbed to administration in late November 2008, just as the key Christmas trading period was getting under way.

Since then tough trading conditions and online competition has pushed other retail names into administration, from HMV and Borders to Jessops and Austin Reed. In many instances a proverbial red flag was provided by the removal by insurers of trade credit cover from the company’s suppliers shortly before its demise.

A tightening squeeze

Add to this the increased political and economic uncertainties of the past couple of years, such as the Brexit negotiations, and it explains why interest in trade credit insurance has increased. An added factor that may drive the hardening of the trade credit market over the months ahead is the recent interest rate increase and the resultant further squeeze on corporate margins, says Trevor Williams, QBE Insurance’s head of credit and surety for European operations

“Additionally, we are seeing increased reliance on credit polices used as collateral for funding, with the financier looking to the insurer to confirm credit worthiness to allow funds to be advanced to the insured,” adds Williams. “A hardening market could prove to be an issue for some, as businesses tend to be slow in making the decision to buy trade credit cover due to the non-compulsory nature of the product.”

However, he suggests that a trade credit insurance policy provides two primary benefits that corporate treasurers and CFOs should be aware of:

  • It protects cash flow and profitability; There has been an unprecedented volume of large corporate household-name failures over the past 18 months, (Toys ‘R Us, Palmer & Harvey, Carillion, Maplin, HoF and more) each owing millions to unsecured creditors. Those unsecured creditors holding credit insurance for the failed businesses will have received payment for their insured trade swiftly after those failures.
  • Replacing lost revenue/increasing revenue safely; it is hard to replace lost revenue when a major client fails and credit insurance can assist with this through enabling large insured credit limits to be provided to new clients without building up trading history over time. Once you have an insured limit you are free to trade to that level immediately and credit limits are retrospective, meaning you will also be covered for existing receivables.

In addition to retail Williams cites office supplies, certain sub-sectors of construction, automotive and recruitment into high risk sectors as “all challenging sectors currently”. In addition, the casual dining sector has faced challenges from the impact of the national minimum wage and input price inflation, as well as the fall in the pound reducing the profitability on food sales.

A competitive market

The good news is that the trade credit insurance market is attracting additional players on both sides of the Atlantic. Earlier this year, long-time trade credit insurer Euler Hermes launched Credable, an invoice insurance brand promising to “revolutionise the way that smaller businesses protect themselves against bad debts”, while speciality insurer Ascot recently entered the US trade credit insurance market.

“Trade credit has always been an ultra-competitive insurance market and no more so than the past three to five years,” says Williams. “Rates are at a ten-year low, but recent corporate failures and a high number of claims paid by insurers are signs they could begin to harden.”

There are alternatives to insurance, with some companies considering dynamic discounting – accepting less than 100% payment in return for an invoice being paid immediately. “This is an option but there’s no need to take such action if you have a good trade credit insurance policy that works for your business,” Williams suggests.

“Our own risk underwriters are sector specialists and deal directly with the policyholder and their buyers, so a close dialogue is held at all times. Discussions regarding repayment strategy are held regularly and a trade credit policy can provide great leverage for repayment as buyers want to avoid credit limits being withdrawn.

Looking ahead, what new or emerging trade credit risks could develop into major issues? “There is a risk that monetary tightening could lead to a credit crunch in certain markets,” Williams suggests.

“Risks such as supply chain disruption as result of large corporate failures, increased trade protectionism and weakening/disintegration of multilateral organisations – such as the EU post-Brexit and Nafta – are also emerging concerns for businesses.”

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