The withdrawal of credit insurance has hit suppliers hard. But it doesn't necessarily spell the end for a company, report Peter Cripps and James Ball
In the space of months, trade credit insurance has gone from a dull-but-worthy fact of business to a critical survival issue for companies across the food and drink sector as cover is pulled from company after company.
The situation has become so serious that the Government is widely expected to announce an aid package later this month.
Some would argue it’s too little, too late. Suppliers to Woolworths were covered for the cost of their shipments – until the big three credit insurers withdrew cover. Suppliers promptly cut their losses, hastening its demise in December. Hundreds of companies have since had their trade credit insurance limits cut or withdrawn, from small businesses right up to Premier Foods and Bakkavör.
So just how critical has credit insurance become? And what help is out there for companies most at risk from losing it?
Whether losing trade credit cover is irritating or crippling depends on a variety of factors, say experts. Foremost among those are the continued backing of a company’s suppliers and bankers. The loss of credit insurance is deeply worrying for both, and even relatively stable companies fear they will lose their backers’ support if cover is pulled.
Foodservice is particularly at risk of further cuts in cover as catering demand falls away, warns leading insurer Atradius. Only this week, Brakes became the latest company to see insurance for some of its suppliers withdrawn, and wholesalers in general are concerned at the consequences of even fairly small reductions in insurance cover provided to suppliers.
“Whether we could deal with a reduction in credit from suppliers depends on how close they run to their overdraft limits,” says one wholesaler. “The moment credit insurers start restricting companies like us is the minute the alarm bells go for our suppliers.
“We would have to reduce our limits and reduce our orders as many suppliers insure their entire debt with us. There are not many companies that could pay up front and the few that could wouldn’t want to because they wouldn’t want to tie up their cashflow.”
Suppliers are faced with a difficult set of choices once cover has been withdrawn from key customers, including whether to demand payment up front, stop supplying their customer – damaging their own business – or supply uninsured. Their decisions can have major repercussions for supplier and customer alike.
“When customers have their cover withdrawn or cut, we have to get in touch and ask them to pay in advance,” says one supplier. “If they’re unable or unwilling to do this, in the vast majority of cases we can’t go on supplying to them. To supply uninsured is a strategic decision, ruled by a number of factors. It’s something we’re only doing for a few of our major long-term customers with whom we have a very close relationship.”
The difficulty for suppliers trading uninsured is that often it is not just a question of taking the risk of a customer defaulting on payments. Companies whose customers have had their cover withdrawn often face reductions in either their banking facilities or trade credit cover to their own suppliers. This shifts the dilemma as well as working capital issues right down the supply chain, exacerbating problems in a downturn.
“I don’t have any real confidence in credit insurers,” the supplier says. “They withdraw cover on dozens of our customers at a time, then just a few days later do so on more. They wield huge power and I’m not sure they use it well. They themselves have had huge losses, partly from their own bad judgement.”
One-stop shop
There is, however, one service that claims it is extending its trade credit services, regardless of the increasingly risk-averse environment.
Backed by Euler Hermes, the world’s largest credit insurer, and credit insurance broker Aon Trade Credit, the new service, Aon Tradeability, aims to be a “one-stop shop” for insurance cover.
It provides credit insurance, risk assessment, debt collectors and information on customers’ ability to pay for smaller businesses. Aon Tradeability says this year 20% more SMEs are looking for trade credit cover in the wake of increasing insolvencies.
“Smaller businesses don’t have the resources to invest in credit management and this allows them to outsource that,” says Stuart Lawson of Aon Tradeability. “The contracted banking facilities make it a much riskier environment than we have seen for a long time, and our market research shows bad debt is a key risk for businesses.”
Wholesalers are generally treating Aon’s insurance proposition with a degree of scepticism, despite admitting increasing levels of bad debt. Wholesale customers tend to be much smaller than companies credit insurers typically deal with, leading some to prefer in-house risk assessment.
“It would be almost impossible to insure our customers’ debt because they are small family-run businesses,” says one. “We feel we can manage our risk better than them, though you expect a certain amount of bad debt in this game and I think we will see twice the usual this year. Insurance is a non-starter for us as our margins are only about 1% and I’m not prepared to halve our profits to pay an insurance company.”
Government action
This is where the Government could step in. BERR is widely expected to announce measures to shore up the credit insurance market in the next few weeks.
Though no details have been formally released, the most likely scenario is that the Government agrees to share 50% of the cost of any payout with insurers, reducing the risk to the insurer of providing cover. This would not only enable insurers to resume cover for some companies they currently judge too risky, but also reduce its cost – potentially making it viable for wholesalers to insure the credit of some larger independent customers.
Government action to stem the withdrawal of trade credit insurance from companies right across the food and drink sector could save many companies the risk of trading without cover.
This would help many companies avoid steep interest charges and ease pressure on working capital. But it may not prevent companies going out of business. For some it will just delay the inevitable, experts warn.
“If your business is in good health, withdrawal of credit insurance cover is a hassle and an irritant,” says Duncan Swift of consultancy firm Grant Thornton. “It damages your creditworthiness with your suppliers, but this can generally be dealt with – by taking tighter terms from suppliers. That does increase your working capital requirement, leading to higher interest costs and other difficulties, but it’s more of a nuisance than anything else.
“If, however, you’re in less robust health and working capital is already tight, it can push a business over the edge. Withdrawal of cover only speeds up the decline of the terminally weak.”
In these exceptional times, it looks as though the Government’s exceptional intervention can’t come soon enough.n
In the space of months, trade credit insurance has gone from a dull-but-worthy fact of business to a critical survival issue for companies across the food and drink sector as cover is pulled from company after company.
The situation has become so serious that the Government is widely expected to announce an aid package later this month.
Some would argue it’s too little, too late. Suppliers to Woolworths were covered for the cost of their shipments – until the big three credit insurers withdrew cover. Suppliers promptly cut their losses, hastening its demise in December. Hundreds of companies have since had their trade credit insurance limits cut or withdrawn, from small businesses right up to Premier Foods and Bakkavör.
So just how critical has credit insurance become? And what help is out there for companies most at risk from losing it?
Whether losing trade credit cover is irritating or crippling depends on a variety of factors, say experts. Foremost among those are the continued backing of a company’s suppliers and bankers. The loss of credit insurance is deeply worrying for both, and even relatively stable companies fear they will lose their backers’ support if cover is pulled.
Foodservice is particularly at risk of further cuts in cover as catering demand falls away, warns leading insurer Atradius. Only this week, Brakes became the latest company to see insurance for some of its suppliers withdrawn, and wholesalers in general are concerned at the consequences of even fairly small reductions in insurance cover provided to suppliers.
“Whether we could deal with a reduction in credit from suppliers depends on how close they run to their overdraft limits,” says one wholesaler. “The moment credit insurers start restricting companies like us is the minute the alarm bells go for our suppliers.
“We would have to reduce our limits and reduce our orders as many suppliers insure their entire debt with us. There are not many companies that could pay up front and the few that could wouldn’t want to because they wouldn’t want to tie up their cashflow.”
Suppliers are faced with a difficult set of choices once cover has been withdrawn from key customers, including whether to demand payment up front, stop supplying their customer – damaging their own business – or supply uninsured. Their decisions can have major repercussions for supplier and customer alike.
“When customers have their cover withdrawn or cut, we have to get in touch and ask them to pay in advance,” says one supplier. “If they’re unable or unwilling to do this, in the vast majority of cases we can’t go on supplying to them. To supply uninsured is a strategic decision, ruled by a number of factors. It’s something we’re only doing for a few of our major long-term customers with whom we have a very close relationship.”
The difficulty for suppliers trading uninsured is that often it is not just a question of taking the risk of a customer defaulting on payments. Companies whose customers have had their cover withdrawn often face reductions in either their banking facilities or trade credit cover to their own suppliers. This shifts the dilemma as well as working capital issues right down the supply chain, exacerbating problems in a downturn.
“I don’t have any real confidence in credit insurers,” the supplier says. “They withdraw cover on dozens of our customers at a time, then just a few days later do so on more. They wield huge power and I’m not sure they use it well. They themselves have had huge losses, partly from their own bad judgement.”
One-stop shop
There is, however, one service that claims it is extending its trade credit services, regardless of the increasingly risk-averse environment.
Backed by Euler Hermes, the world’s largest credit insurer, and credit insurance broker Aon Trade Credit, the new service, Aon Tradeability, aims to be a “one-stop shop” for insurance cover.
It provides credit insurance, risk assessment, debt collectors and information on customers’ ability to pay for smaller businesses. Aon Tradeability says this year 20% more SMEs are looking for trade credit cover in the wake of increasing insolvencies.
“Smaller businesses don’t have the resources to invest in credit management and this allows them to outsource that,” says Stuart Lawson of Aon Tradeability. “The contracted banking facilities make it a much riskier environment than we have seen for a long time, and our market research shows bad debt is a key risk for businesses.”
Wholesalers are generally treating Aon’s insurance proposition with a degree of scepticism, despite admitting increasing levels of bad debt. Wholesale customers tend to be much smaller than companies credit insurers typically deal with, leading some to prefer in-house risk assessment.
“It would be almost impossible to insure our customers’ debt because they are small family-run businesses,” says one. “We feel we can manage our risk better than them, though you expect a certain amount of bad debt in this game and I think we will see twice the usual this year. Insurance is a non-starter for us as our margins are only about 1% and I’m not prepared to halve our profits to pay an insurance company.”
Government action
This is where the Government could step in. BERR is widely expected to announce measures to shore up the credit insurance market in the next few weeks.
Though no details have been formally released, the most likely scenario is that the Government agrees to share 50% of the cost of any payout with insurers, reducing the risk to the insurer of providing cover. This would not only enable insurers to resume cover for some companies they currently judge too risky, but also reduce its cost – potentially making it viable for wholesalers to insure the credit of some larger independent customers.
Government action to stem the withdrawal of trade credit insurance from companies right across the food and drink sector could save many companies the risk of trading without cover.
This would help many companies avoid steep interest charges and ease pressure on working capital. But it may not prevent companies going out of business. For some it will just delay the inevitable, experts warn.
“If your business is in good health, withdrawal of credit insurance cover is a hassle and an irritant,” says Duncan Swift of consultancy firm Grant Thornton. “It damages your creditworthiness with your suppliers, but this can generally be dealt with – by taking tighter terms from suppliers. That does increase your working capital requirement, leading to higher interest costs and other difficulties, but it’s more of a nuisance than anything else.
“If, however, you’re in less robust health and working capital is already tight, it can push a business over the edge. Withdrawal of cover only speeds up the decline of the terminally weak.”
In these exceptional times, it looks as though the Government’s exceptional intervention can’t come soon enough.n
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