Trade Credit: The lifeline Brexit-Era businesses require

Various factors led to £5.86m of bad debts being written off by Britain’s British SMEs alone in the last financial year and the world’s largest trade credit insurer, Euler Hermes, warns that a no-deal Brexit would wipe out £3.5bn in UK automotive exports and the ramifications for the chemicals and machinery sectors would be even greater.

Currency exchange rates and the Pound’s weakening following Britain’s ‘Leave’ vote have contributed to high profile business failures, including that of Monarch Airlines. Meanwhile, the high street is increasingly challenged by agile, low-overhead, internet giants, whose competitive tactics have contributed to a recent string of high profile bankruptcies involving names such as Mothercare, Toys R Us and Game.

40% of most businesses’ assets are tied up in their debtor book and 70% of businesses suffer a bad debt.

Other big scalps claimed by British business’s grim reaper, include grocery wholesaler Palmer and Harvey, which collapsed in November 2017 with debts of over £700m, and Poundland, which entered into administration in June 2018.

As Britain will no longer be an EU member state after March 29, 2019, panic has set in with regard to EU-sourced supplies, particularly in the food and drink sector where 51% of the UK’s supplies are imported predominantly from member nations. Some businesses are stockpiling products that can be bought in advance, driven by a fear these will be impossible or too expensive to buy after March 29. This has major implications.

Cash is leaving importers’ bank accounts, but sales are not yet covering the cost of these stockpiled purchases. The UK’s days sales outstanding figure (the average number of days it takes a business to collect payment following a sale) is showing an upward trend and a worryingly negative gap is emerging between revenue earned and expenditure incurred.

Some importers may feel immune to failure but, if over-confident, they could be jeopardising not just their future, but potentially that of their suppliers. If any supplier’s cashflow is hit, they may also be unable to survive, possibly then causing a domino-effect supply-chain collapse of Carillion proportions to occur.

In the uncertain trading climate triggered by Brexit, businesses should probably consider Trade Credit Insurance, which covers bad debts caused by insolvency, protracted default and political risks. It assists the cashflow of insured policyholders, paying bills that might otherwise remain unpaid by a financially troubled debtor.

With Trade Credit Insurance as their safety net, businesses can confidently tackle their growth objectives and seek better terms from suppliers and financial lenders. The trade credit policy insurer may also provide the most up-to-date credit check information on potential new customers, to try to prevent late payment and bad debt issues emerging in the first place. Some trade credit insurance policies will also include cover for debt recovery and legal costs incurred chasing debts.

Businesses recognising the advantages of such protection would be well-advised to buy it quickly. Trade credit insurers have been hit hard by big payouts on “high severity” collapses over the past few years and a 5% increase in the cost of trade credit protection is predicted by Euler Hermes.

Trade credit claims are running at £4m per week, their highest level since 2009. The £225m paid out in 2017 was an 8-year high and a 7% increase on 2016. Already, England and Wales have seen 4462 business insolvencies in Q1 2018, a 13% rise on the same period last year. It is fair to say a tsunami of debt is expected.

As experts suggest 40% of most businesses’ assets are tied up in their debtor book and 70% of businesses suffer a bad debt, it makes sense for anyone trading business to business on credit terms to buy Trade Credit Insurance. If you recognise the need to do this, please get in touch with us.

Sources:
https://www.eulerhermes.com/en_global/media-news/news/press-release-eulerhermes-launches-advanced-payment-protection-.html
https://www.manufacturingglobal.com/leadership/no-deal-brexit-could-wipe-outbillions-uk-industry-exports