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Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance

Withdrawal of credit insurance exposes suppliers to greater risks

credit insurance removal increases risk to suppliersWhile it is true that running a business is always challenging the withdrawal of credit insurance is adding to the cash flow pressure on supply chains and in particular on retailers.
Trade credit insurance protects suppliers by minimising the financial impact if a customer fails to pay for goods and services.
The withdrawal of credit insurance is normally based on a company’s credit rating that in turn is adjusted based on disclosed accounts, county court claims, statements by directors and adherence to payment terms as information that is increasingly being provided by suppliers.
For more than a year, the retail sector has been in the spotlight due to the high profile restructuring of several large chains and there would seem to be little sign of this abating, according to recent reports highlighting the latest move, by Paris-based insurer Euler Hermes, which reduced the credit cover it provides to Iceland’s suppliers over the summer.
Euler Hermes is not the only insurer to have taken steps to reduce its exposure. Atradius has also been following the same path, removing cover last year from Debenhams.
According to the most recent figures produced by the ABI (Association of British Insurers) in the first quarter of 2019 the number of insurance claims made so far by UK businesses facing bad debts had reached its highest level in ten years.
It said that there were 5,114 new trade credit insurance claims made, up 6% on the previous quarter and that the value of claims paid was £48 million, up £1 million on the previous quarter. The average payment was £9,000.
So, it is perhaps not surprising that insurers are continuing to take steps to mitigate their exposure as insolvencies continue to climb in the face of political and economic uncertainty.
But the inevitable consequence is that the risk is being pushed back to suppliers, who in turn are reducing the amount of credit they extend to their customers. This is impacting on suppliers and their ability to maintain sales volumes to bigger customers.
For many suppliers with weaker balance sheets or who depend on a few large customers this can leave them taking the credit risk and often means waiting longer for payment.
Should SME suppliers continue to supply a customer if credit insurance is withdrawn?
It is all very well to advise SMEs to ensure they have a broad spread of customers perhaps with no one representing more than ten percent of the sales ledger, but opportunities need to be grabbed and growth is often achieved by taking some risks. It is a brave company that forgoes the benefit of having large and profitable customers. Despite this it is imperative to avoid being caught up in a domino insolvency if a key customer fails.
Growing a business takes time, forethought, planning and access to capital, none of which is available in abundance in the current uncertain national and global economic climate.
So, is there any way suppliers can protect themselves?
One route is to start to demand payment upfront, which may mean re-negotiating supply agreements, although it is debatable whether customers will oblige, which could then force the supplier into seeking help from the Late Payments Commissioner.
Another route could be to protect at least some of their revenue by using factoring or invoice discounting services. Both services tend to offer non-recourse facilities as a form of insurance to protect against approved but unpaid invoices. While this route involves credit insurance the finance providers often share a level of risk by underwriting better credit terms since they also want to make their own profits.
It is understandable that insurers will want to protect themselves but their service is a market and they may take a level of risk to get your business.
However risk is managed, there is a need for a strong balance sheet and credit management to avoid the fallout when a customer fails to pay your bills.
 

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance Rescue, Restructuring & Recovery Turnaround

Can SMEs afford to recover debts?

From this week SMEs wanting to pursue recovery of a debt of £20,000 or more through the civil courts will have to pay an advanced fee of £1,000 or more.
The fees for civil courts have been increased by an estimated 600%, on a sliding scale calculated at 5% of the value of the amount claimed.
The payment has been increased by more than the actual cost of court action and is therefore called an “enhanced” fee.
The worry is that debtors will have even less incentive to pay what they owe if they suspect their creditor cannot afford the court fees to recover debts.
SMEs would be well advised to take even greater care to protect themselves when taking on new customers. For B to B services it is always advisable to check the credit history of a potential business client and be very clear on the wording of any contract.
Businesses should also check the small print of any credit insurance they might have. They need to know the cost of making a claim in addition to that for the credit insurance as claims normally require proof of default such as getting a court judgement and enforcing this before being able to make a claim.
This also may justify factoring where the finance provider normally collects the debts, although beware any recourse clause that allows them to transfer uncollected debts back to the company.
For both B to B and B to C businesses it is also advisable to review credit risk and terms such as deposits, significant early payment discounts and security including personal guarantees should be considered. Why wouldn’t a personal guarantee be provided if the client’s intention is to pay the debt?
A supplier of goods to Viper Guard, my vehicle parts company, offers a 30% discount for payment within 30 days. They always get paid on time.
While final approval was passed in the House of Lords last week, it is expected that the Law Society and other lawyers’ representative bodies will seek a judicial review of the legality of the new charges.