With the current economic downturn showing no sign of abating and the economic landscape continuing to change, businesses now face new financial challenges to those of 12 months ago. Access to credit and credit insurance has become increasingly difficult to come by and according to Jeremy Cope, partner at Birmingham-based chartered accountants and business advisors Smith Cooper, businesses need to be doing more to manage the risks.
“According to the association of British Insurers (ABI), the total value of trade credit insurance claims rose by 166% to a record £316m in the first quarter of 2009, due to a wave of insolvencies brought on by the current climate, coupled with the fact that the UK economy shrank by a record 2.4% last year.
For businesses, credit insurance provides a lifeline against the issues caused by trading with other companies on credit terms – and given the current climate, can prove to be an invaluable asset.
Claims made by UK companies for defaults on payments for domestic and international trade soared by 48% to 9,213 in the first quarter, hitting the bottom line of leading credit insurers. It was the fifth consecutive quarter that claims have risen year-on-year, so it’s not surprising that it has become more difficult for firms to access credit insurance policies.
With this in mind, businesses must take a proactive role and work to actively minimise risks to their businesses.
Historically, trade credit insurance companies relied upon published financial information filed at Companies House.
This information can be limited in scope and is often filed many months after the relevant year end, with the result that the trade credit insurance companies have not known a business is in trouble until it is too late for them to adjust their approved credit limits.
A consequence of this is that trade credit insurance companies are increasingly insisting that more up to date information is made available to them by businesses in order that credit limits are maintained.
It is therefore vital for businesses not only to ensure that statutory accounts are filed at Companies House in a timely fashion, but also to ensure their management accounts are up to date and to be prepared to share these with the trade credit insurance industry.
One high profile casualty of not keeping things up to date was Gordon Ramsay who in January 2009, after failing to file the accounts of Gordon Ramsay Holdings on time for two years as required by law, had his credit insurance pulled and was given a mandatory fine - not a wise move in such a volatile climate.
Due to the severe difficulties encountered by business in obtaining sufficient trade credit insurance from traditional sources, the Government has set up its own scheme to help businesses obtain cover.
The Department for Business, Innovation and Skills (BIS) announced on June 9 that it was expanding the government's five billion scheme to support SMEs access to adequate levels of trade credit insurance. SMEs will now be able to participate in the programme if they have had their cover reduced, or cancelled and reinstated at a lower amount, since October 1, 2008.
The scheme allows suppliers to purchase Government-backed insurance to restore cover to either the original level or double the amount that they are able to obtain from private insurers, using the lower amount available under these two options and up to a maximum of £1m. The program, which is to run until the end of 2009, aims to address the shortage of trade credit insurance that arose in the wake of the credit crunch and recession.
The new scheme has been welcomed by trade credit insurers and industry lobby groups, as it will help to stabilize more supply chains across the UK and allow many firms to continue to trade through the recession.
So whilst the Government may be stepping in to help out SMEs, it is essential that businesses take the appropriate measures to manage the risks associated with credit.
