News from NorthgateArinso Employer Services

It can be argued that, over the last few years, the real value of trade credit has not been fully recognised.

Many companies have had a strong cashflow and this, allied with a benign economic climate and steady level of corporate failures, has reduced the risk associated with trading on credit. However, the changing economic climate means that confidence in granting credit is reducing, leading to an increasing interest in Credit Insurance.  

The cause of this has been the repricing of risk triggered
by Sub-Prime lending defaults in the USA, resulting in a shortage of finance and volatility in the stock markets, with US Sub-Prime delinquent debt rising at an alarming rate. For example, in the USA in 2003 four per cent of debt defaulted after an average of 48 months. In 2006, this default figure had risen to ten per cent and the average default time fallen to 12 months.

Much of this debt is ultimately owned by major financial institutions and the knock-on effect has been illustrated in the Bank of England Credit Conditions Survey Quarter Three 2007, which highlights that lenders have reduced the amount of credit available to the corporate sector and they expect credit availability to fall further.

That this increasing difficulty in obtaining additional / temporary bank funding has occurred now is particularly worrying, as quarter four into quarter one is traditionally the worst period of the year for corporate insolvencies, and a restriction in the availability of funds could increase this figure, leading to an increase in bad debt. One impact of this is that terms of payment will get longer and the cost of funding this will be tough; too tough for some. Atradius, (one of the UK’s largest credit insurers) have already seen requests to push terms out from 60 days and 150 days.

To compete in a competitive market, sector companies need to offer credit. They also need to protect their credit risk as much as possible and manage the sales ledger cycle, so they can be confident that bad debt will not impact upon their ability to trade.

Credit Insurance provides between 80 per cent – 100 per cent cover against the non-payment of commercial debts due to the insolvency or default of an insured customer.

Companies can choose whether to insure just their export ledger, UK ledger, top accounts, selected markets / buyers or any combination. It is backed by a credit limit service and sometimes a debt collection service. Cost is calculated using a number of differing factors including previous bad debt experience, level of projected sales, trade sectors and deductibles. Willis Credit Risks are able to assess the potential credit risk within a company and offer advice on possible solutions to reducing that overall risk.

Credit Insurance can literally save the life of a company. A glazing company in the North East was hit by a number of bad debts which had a potentially catastrophic impact on their cashflow. However, they had taken out Credit Insurance and were able to claim on their policy. As the Finance Director of the company said at the time, “Without Credit Insurance we would not have been able to replace our working capital as quickly as we did following a number of insolvency losses we suffered in 2006. Credit Insurance allowed our funders to remain confident in our business plan and without this insurance our prospects of continued trading would have been slim.”

“The Credit Crunch points to a tough time ahead but the Credit Insurance market remains competitive and Willis would encourage companies without Credit Insurance to explore the opportunity to insure this key part of the business,” said Joanne Locke, Product Development Manager, “So they can continue to offer credit with confidence, and stay one step ahead of their competition.”