Companies increasingly using trade credit insurance to protect themselves against risks posed by struggling firms
Despite a fall in the overall number of insolvencies in the UK, heightened concerns about the vulnerability of trading partners, as well as rate reductions averaging 20%, is contributing to growing demand for trade credit insurance, particularly among large UK corporates.
According to Marsh, more UK firms are using trade credit insurance, which protects balance sheets against credit risk such as protracted default, insolvency or bankruptcy, due to concerns that potential interest rate rises could create a surge in corporate insolvencies.
Tim Fisher, Leader of Marsh’s UK Trade Credit Practice, explained: “Many organisations are more risk averse as a result of the recession and are acutely aware that even a slight increase in bad debt and interest rates could derail their firm’s recovery as the economic outlook improves.
Recent research by R3, the insolvency trade body, indicates that while the majority of UK organisations are now optimistic about the economic outlook, 11% of firms are regularly using their maximum overdraft, representing an increase of one percentage point since October 2013. It is this which is fuelling concerns about partner insolvency risk among corporates.
“While we are some way from seeing the impact that zombie companies had on Japan, companies are still concerned about the impact an interest rate rise might have on their trading partners. It can be incredibly challenging for businesses to identify struggling firms among their client base and in their supply chains. This puts those firms that are working hard towards achieving growth and profitability in a vulnerable position,” continued Mr Fisher.
“Trade credit insurance provides an added element of credit management discipline and customer insight, as well as protection against trade debt. This can be particularly important when moving into unfamiliar markets or territories, or when seeking to increase trade with key customers.
“In our experience, companies are more likely to experience difficulties during the recovery when sales are rising. Lenders remain broadly risk averse, which can lead to a working capital crunch. We expect more firms increasingly to use trade credit insurance as they look to grow further throughout 2014.”
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