Although 30,000 British businesses are thought to be owed around £1bn by collapsed outsourcing company Carillion, the Association of British Insurers (ABI) reckons it will pay out just £31m in claims on “trade-credit insurance” policies taken out by suppliers.
The tiny amount underlines the low take-up of such insurance, which pays out to policyholders if one of their customers falls into insolvency and is unable to pay its bills. That’s unfortunate: the continuing headlines about small and medium-sized enterprises (SMEs) going to the wall because of Carillion’s failure demonstrate the potentially devastating impact on SMEs of a major customer’s failure.
How trade-credit insurance can help
In the UK, receivables (amounts owed to a business) account for around 40% of the typical SME’s total assets, so not protecting such a crucial element of the balance sheet is risky. The main benefit of trade-credit insurance is that it provides a pay-out if the worst happens. But it can benefit SMEs in other ways too.
For example, having insurance in place may allow you to offer potential customers more favourable credit terms when you’re pitching for new business, safe in the knowledge that you’re protected from a default. It may strengthen your application for bank finance, with lenders looking at exposure to receivables as one of their key criteria for assessing SMEs. It may even help you to access new markets where your business has little experience: trade-credit insurance is available for export sales too.
It’s also a good idea to look closely at the support prospective trade-credit insurers can offer your business alongside the policy itself. These firms conduct their own due diligence on large contractors, so they can be a vital source of intelligence on customers’ creditworthiness. They may also be able to offer support with collecting debt and provide cash flow support by indemnifying you against losses.
As of mid-2017, despite an uptick in recent years, there were still only 12,000 trade-credit insurance policies in force in the UK, according to the ABI – a tiny number given that there are 4.9 million private-sector businesses registered across the country. Explanations for this could be a lack of awareness of the product and the widespread assumption that cover will be prohibitively expensive. While costs vary enormously, expect to pay between 0.1% and 1% of the sum insured as an annual premium. Given that the average SME writes off bad debts worth 0.7% of sales each year, that doesn’t look bad value.
What to do if you’re owed money
If your business has been hit by the Carillion failure, seek help as soon as possible. The major high-street banks, including Barclays, HSBC and Royal Bank of Scotland, have jointly set aside hundreds of millions of pounds to support affected SMEs.
No bank is offering to write Carillion victims a blank cheque for their losses, but the support funds will help many SMEs through payment holidays, the waiver of overdraft fees and potentially help with working capital.
Beyond the high street, the government-backed British Business Bank, which works with around 40 lenders to deliver SME funding through the enterprise finance guarantee, has this week announced its own Carillion support scheme. It is making £100m available through its partners, pledging to cover 75% of any losses sustained by the banks.
Unfortunately, very few SMEs are likely to receive compensation for their Carillion losses and no support scheme will make good the shortfall. Still, the initiatives may at least help firms to deal with the most immediate pressures brought on by Carillion’s collapse.