Ross Andrews ACA on how the government are supporting businesses through a trade credit insurance guarantee.
"We're all in this together!"
So said former Prime Minister, David Cameron, back in 2009.
What he meant by this was the lack of access to credit and funding from the banking crisis meant many businesses wouldn't be able to fulfil their liabilities. This in turn spread contagion through the system as other organisations ended up writing off some of their debtors.
Thankfully there is a means by which businesses can protect themselves from this risk via trade credit insurance. The problem now however, is the potential scale of a recession caused by the COVID-19 lockdown means credit insurance companies are likely to face significant claims as businesses struggle to pay their bills.
This in turn could make the cover very expensive to purchase or even result in such policies being taken off the market.
What is trade credit insurance?
Trade credit insurance provides protection to businesses in the event that their customers don't pay for the products or services they've ordered, or pay later than required in the payment terms. This ensures businesses can extend credit to customers which in turn helps support supply chains.
How the government are stepping in
Claims on trade credit insurance tend to be made in instances of insolvencies.
According to the FT 500,000 UK businesses are in financial distress and this insurance covers some 13,000 suppliers and 650,000 customers. They also quote an estimate that insurers around the world may have to pay up to $46bn in claims on trade credit insurance policies because of the coronavirus pandemic.
If this insurance becomes very expensive, or no longer available, then that runs the risk of corporates not trading with SMEs. Larger businesses won't want to rely on having to trade with smaller organisations that are potentially financially at risk of closure.
Thankfully the government are now following in the footsteps of Germany and France by setting up a reinsurance arrangement with key UK insurers. This means the government are guaranteeing trade credit insurance policies to the sum of £171bn to ensure the market doesn't seize up.
Further details as to how this will work will be publicised at the end of May 2020. Be sure to bookmark this page as we'll be updating it as and when these announcements are made public.
The content of this post was created on 29/05/2020.
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