Credit insurance and insolvency
Credit insurance
Amidst all the doom and gloom of the recession and the preoccupation with the credit crunch, one factor has emerged that is potentially as serious as being unable to increase or even keep existing bank finance. That factor is credit insurance.
Most businesses need working capital and at present need their banks to support them. But banks are freezing or reducing facilities.
More and more businesses are using invoice discounting to help manage their working capital. Credit insurance is often offered by the same bank that is providing the invoice discounting.
Unfortunately, the credit insurance market has shrunk dramatically. The world’s biggest insurer, AIG has almost gone out of business and other credit insurers have simply withdrawn from the market. As business risks and failures have mushroomed, the cost of credit insurance has risen and the availability has fallen.
This leads to concerns that businesses need to take seriously. Their customers’ credit rating may be withdrawn suddenly. Their own business may lose either or both their credit rating and/or their ability to insure risk. Credit limits for individual customers may be reduced or removed, either for credit insurance or invoice discounting purposes. In any of these cases, the effects can be immediate, damaging or even terminal.
One of the UK's biggest insurers Euler Hermes has been critisised in an article in Accountancy Age for causing insolvencies. Fabbrice Densos, the CEO of EH in the UK said, in relation to statutory financial statements
'If anything, it proves how difficult it is to analyse credit risk based on statutory accounts, because some statements in the public domain are not as strong as they first look'
You can read the full article here: http://www.accountancyage.com/accountancyage/news/2241782/insolvencies-fault-euler-chief
In the budget statement the Government rolled out its credit insurance scheme which will allow companies to purchase additional cover they have thier credit lines removed.
We have been building valuable links with the three main credit risk suppliers Euler Hermes, Coface and Atradius. The information that we have gained and the links that we have forged will benefit our clients in these trying times.
Recommended considerations if you insure your credit risk
We recommend that you review all your customers’ credit positions as soon as possible. In addition, you should consider the following:
• Try not to exceed your credit insurance or invoice discount credit limits. You will not get the money back beyond these levels if the customer fails.
• Try and make customers stick to your standard terms. Most companies are having these stretched by their debtors.
• If you can, try and change the basis of payment to shorten the payment term or even ask for all or a proportion up front
• If a customer is on stop or at their limit, don’t sell them anything
If you or your suppliers insure your risks
• Investigate the possibility of breaking your reliance on one supplier for key materials that could ‘stop’ your business in its tracks.
• Make sure your accounts and Annual Return are always up to date. There is no reason why you shouldn’t file them early if you can. Banks, customers and credit insurers check this information.
• Make sure you don’t get or risk a default, CCJ or similar. It could damage or remove your credit rating. If your suppliers cannot get credit insurance on you, they may refuse to deal with you.
• Investigate the possibility of breaking your reliance on one supplier for key materials that could ‘stop’ your business in its tracks.
• Maintain communication with your suppliers, especially if you cannot pay them ‘on time’. Sometimes credit insurers will ‘audit’ your account and check that it has been administered satisfactorily.
• Keep your finances in order and maintain up to date information. In one instance we are aware of the insurers insisted on seeing the latest management accounts for a company before they would issue a credit rating.
These are challenging times to do business and remember that we are here to help. In these matters our key motivation is to ensure that you survive and thrive. We do not take a ‘taxi meter’ approach to discussing matters with you, so feel free to call.