Increase in demand for credit insurance policies
Bay Trading, a fashion store aimed at women aged 16-30, has entered into administration. Alexon Group PLC, the group behind the chain, has stated that its other brands, including Ann Harvey, Eastex and Kaliko, will be unaffected by the development.
A recent report advised that the decision to proceed to administration was taken after credit insurance was withdrawn. In today’s economic climate, this is becoming increasingly common. The government has recently introduced a new scheme aimed at restoring cover reduced by credit insurers in order to help struggling businesses.
Credit insurance
Credit insurance, or trade credit insurance, is a policy commonly taken out by those in the retail sector. It covers a portfolio of customers and will pay out if there is protracted default or customer insolvency. It is generally aimed at companies for whom bad debts would cause significant damage, i.e. where the main asset is the company's debtors book. With the bedding down of the credit crunch, however, there has been an increase in demand for such policies, and an increase in reticence on the part of insurers. In an article in The Telegraph last November ("Trade credit insurance withdrawal bites", 11 November 2008) Fabrice Desnos, chief executive of Euler Hermes UK explains:
"Where we had no information or little information [before] we would give the benefit of the doubt. We are no longer doing that. We want to be convinced that companies can weather the storm."
Perhaps as a result of a lack of conviction, many businesses are now finding insurers withdrawing or reducing trade credit insurance, or raising the cost of premiums high above previous levels.
Developments
Last month, the Chancellor presented his budget. Among the schemes aimed at UK businesses was a new Trade Credit Insurance Top-Up Scheme. Developed by the Department for Business Enterprise and Regulatory Reform, the Association of British Insurers and a number of trade credit insurers, the scheme aims to restore cover reduced by credit insurers.
Key elements of the Top Up Scheme include:-
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The scheme will apply from 1 May 2009 until 31 December 2009.
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Companies who have had their level of credit insurance reduced – but not withdrawn – from 1 April 2009 will be eligible provided they apply within 28 days of the reduction and that the reduction was at the instance of the provider.
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The companies must have payment terms of no more than 120 days.
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The cover must relate to one particular buyer and the trade must be within the UK.
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Each policy will last for a maximum of 6 months and will be priced at 2% of the value of the cover.
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The terms of the scheme will follow those of the existing policy.
At this point three trade credit insurance providers have undertaken to operate the scheme – Atradius Credit Insurance N.V., Coface S.A. and Euler Hermes UK PLC, although this is expected to increase in time. Application should be made to the existing policy provider.
Bay Trading and beyond?
While the scheme has been welcomed, there is concern that it doesn't go far enough to help struggling businesses. Notably, it would not have prevented Bay Trading from entering administration as it doesn't catch companies for whom trade credit policies have been withdrawn. In the absence of trade credit insurance, some retail businesses may find their funder becoming reticent and, in some cases, withdrawing support. It can also alarm suppliers enough to demand a change in payment practices, which itself will have an effect on working capital and cash flow management. The British Retail Consortium Credit Conditions Survey of its members indicated that 50% of large retailers and 40% of small and medium retailers felt that the reduction or withdrawal of trade credit insurance undermined their ability to trade.
The important thing for any company finding itself in this position is to maintain both good levels of communication with their funder, suppliers and other relevant parties, and good credit control procedures. At this stage discussing both concerns and options with a professional adviser such as an accountant, solicitor or Insolvency Practitioner can provide invaluable assistance.
Update - As of 9 June 2009, and as a result of industry feedback, the Government has extended the top up scheme. The eligibility requirements have been extended and the scheme will now apply to those companies who have had their cover reduced from 1 October 2008. HCC also joins the list of providers who have undertaken to operate the scheme.
For further information please contact: Jennifer Antonelli