Trade credit where it's due

Trade credit insurance acts a vital lifeline to suppliers in stormy economic seas. So why, after throwing it to suppliers this April, is the government thinking of removing it - plunging them back into deep water? James Ball reports


Who gives any thought to their boiler until a pipe bursts at 3am? No-one. People don't notice the mundane but vital things in life until they fail. And so it was with the trade credit insurance system, which collapsed last September.

Insurers, who found themselves overexposed and at risk in the downturn, promptly withdrew or reduced the cover, which protects suppliers' invoices to their customers. Suppliers large and small were suddenly faced with a horrible dilemma: supply without protection or turn away customers.

Some even faced withdrawal of bank facilities as cover was pulled. As the crisis drove businesses to the brink, the government introduced its trade credit guarantee scheme to get capital flowing again. Now it plans to withdraw the scheme at the end of December - a move that could needlessly plunge many businesses right back into deep water - for the sake of a few months.

The absurdity of the scenario is clear. That's why we're calling on the Chancellor to extend it for just a few months longer until the end of the financial year. If he doesn't, the seeds of recovery he has sown will die - and suppliers will be denied the vital lifeline they need to survive.

The situation really is that critical. When suppliers began seeing their insurance limits reduced, one described it as "a credit crunch within the credit crunch".

Longer payment times from major retailers and some large fmcg businesses increased the level of insurance needed just as the big three insurers - Euler Hermes, Atradius and Coface - were forced to reduce their exposure to declining markets.

Euler Hermes, the world's largest credit insurer, reduced its earnings forecast by £80m in January. Woolworths' high-profile collapse was a key cause of the losses, but it was by no means the only expected default. Swathes of reductions in cover followed. Even giant corporates such as Premier Foods and Bakkavör saw limits reduced, while cover on many smaller businesses was withdrawn entirely.

The situation was made far worse by a quirk of bank finance. Risk management teams looking to stamp out potential hazards found smaller businesses were harder to perform detailed credit checks on. Playing safe, overdraft facilities to many small companies suddenly became contingent on all invoices being protected by trade credit cover.

Suppliers have been reluctant to talk on the record for fear of worrying creditors or customers, but when speaking off the record many talk frankly about the severity of the situation.

"We had cover cut or withdrawn on almost all our customers," says one. "That left us making some really tough decisions. For our biggest customers who we had long relationships with, we had the confidence to supply unprotected. But with others we had to demand cash on delivery - which not everyone can afford to pay - or turn away custom. That's no way to do business."

The problem was thrust into sharp relief early in 2009 by BRC research revealing that 50% of large companies had seen their supply chains disrupted by the loss of trade credit insurance. A third of smaller businesses had suffered the same fate, and 80% of retailers reported at least 10% of their suppliers had been affected.

By April, the situation had hit crisis point, and so the government intervened, introducing the credit guarantee scheme. The government offered extended cover to suppliers who had their credit limits reduced - not withdrawn - after April 2009. Cover would be restored to £1m, its original level, or twice what the private sector would otherwise provide, whichever was lowest. Exporters would not be covered under the scheme.

All three major insurers signed up to the guarantee scheme and automatically incorporated it into policies for eligible suppliers. Atradius UK regional director Shaun Purrington said at the time he was "delighted" with the £5bn extra cover. The response from suppliers was decidedly lukewarm, however.

"The guarantee scheme was a plaster over a gaping wound," one supplier specialising in exports says of the original scheme. "It was better than nothing, but too limited to be a complete cure. Only protecting cover cut after April missed the vast majority of withdrawn cover, making it too limited to really help."

So the government made a crucial concession to industry in June and backdated the scheme's eligibility criteria to include all companies whose credit limits had been cut since October 2008.

This made thousands more companies eligible for help and was a key plank in the government's moves to get working capital flowing again. This success makes the decision to withdraw it on 31 December all the more strange.

Ironically, had the scheme stayed true to its original incarnation, its withdrawal at the end of the year might make little difference, says Duncan Swift of accountancy group Grant Thornton.

"The original scope of the credit insurance was so limited that uptake was very small. By April 2009 the insurers had finished reducing credit limits, so almost no-one was eligible for support. On that basis, almost no-one would be hit when the scheme is withdrawn.

"But the extension of trade credit help in June did increase the eligibility significantly, though it's still certainly not without faults. This makes it much less clear whether it could be withdrawn without harm in December."

Because the scheme operates through the credit insurers, rather than directly providing aid to suppliers, few know exactly what impact the withdrawal of cover will have. But many believe the scheme has proven effective in supporting the recovery of credit insurance and pumping money back into the system. "The credit insurance situation has calmed down significantly now," one supplier says. "The government must not do anything to disrupt that until it's absolutely confident it won't cause any more harm."

Secretary of State for Work and Pensions Yvette Cooper accepts that businesses need help in the downturn.

"We've tried to provide as much support for business as possible, and that's why we looked at trade credit insurance," she says. "But you also need to get the economy growing again so these are short-term measures to help get the economy through the recession."

If, as Cooper suggests, such measures should be in place until there are signs of an economic upturn, then the Chancellor's decision to pull the trade credit guarantee scheme on 31 December looks ill-timed to say the least.

Forecasters agree the UK's likely to begin recovery in late 2009 or early 2010, but warn the recovery could be "fragile" and "anaemic". The CBI adds: "The effects of the credit crunch will take time to dissipate."

Withdrawing a lifeline such as the trade credit guarantee scheme too soon would be devastating - especially in late December, when suppliers' working capital and credit insurance limits are at their highest, because Christmas orders have been dispatched but not yet paid.

"Matching the trade credit insurance that private insurers are willing to provide is vital to helping fundamentally sound businesses weather the recession," says the BRC's director of business environment Jane Milne.

"With conditions certain to remain tough into 2010 there will be demand for the trade credit insurance top-up scheme well into the new year. It shouldn't be withdrawn until it's clear it is no longer needed. That's why we support the principle of the Grocer's Push Back the Tax campaign."

Through the first half of 2009 trade credit was top of the agenda in boardrooms of worried suppliers. With the government's help, the workmanlike cover went back to being a business necessity working unnoticed in the background.

Now, suppliers are getting a dreadful sense of déjà vu - and this time there's no rescue package in the pipeline. The Chancellor needs to realise a working supply chain is a sign the help is working, not that it's not needed any more.

December is not the time for Darling to pull the plug. So please join our campaign calling on the Chancellor to Push Back the Tax!