Expert Advice

Credit insurance schemes don't hit the mark

Rimmer urges the government to offer longer terms on credit schemes

As the Government extends its £5bn trade credit insurance scheme to include companies that have been hit by a reduction in cover since last October, Edward Rimmer, UK and Ireland Chief Executive at leading independent invoice financier Bibby Financial Services, asks if this is enough to help UK businesses or if more needs to be done to make this scheme worthwhile.

The Government’s credit insurance scheme, which is designed to tackle the sudden reduction in private sector insurance cover against customer non-payment, has attracted a lot of attention from small and medium-sized businesses since its launch on 1st May this year.

With the Government now backdating the credit insurance scheme by six months to include suppliers that have had cover reduced since 1 October 2008, it is hoped that companies in the UK will now have more breathing space to adjust to the current climate.

However I believe that, despite the recent changes to the credit insurance scheme, there is still room for improvement.

It’s good news that the Government is backdating the credit insurance scheme but we believe it still does not go far enough and the Government should extend it further into the future rather than putting a ‘use-by’ date on it of the end of this year.

Indeed, few in the UK will be surprised if the current downturn lasts beyond the next 12 months or more, and so for businesses that are expecting to trade beyond the end of 2009 this simply doesn’t provide help for long enough.

The Government has imposed cover limits for businesses wishing to buy policies under the new scheme and, with the minimum amount of cover starting at £20,000, I believe some small and medium-sized businesses could find themselves priced out of the market. As is becoming clear, with minimum top-up levels remaining at £20,000, only small numbers of the nation’s businesses are really able to benefit. As I am sure most other business finance providers are finding, debts are still at the smaller end of the market.

Because the scheme does not include reinstating limits that have been pulled completely and instead applies only to companies where cover has been reduced, for example from £100,000 to £70,000, the number of companies who are benefiting from the scheme is still relatively low.

And, although a one-off rather than an ongoing charge, the two per cent top up fee linked to the scheme is above typical market rates and this, combined with insurance premium tax at five per cent, is likely to be less of an incentive and more of a barrier for businesses who want to protect themselves. Cover may also have been pulled from financially sound companies including those within the ‘wrong’ type of industry, such as motoring or construction. These industry sectors are not being given the support they require despite these being the most at risk and the Government doesn’t seem to be offering many lifelines.

So, with the current economic climate remaining a challenging time for many businesses in the UK, it is now more important than ever to be aware of the alternative forms of finance that are available.

One such form of funding is invoice finance, which works by advancing a percentage of the value of a sales invoice, as soon as it is issued. This not only provides a cash injection into the business but also offers access to an ongoing source of funds that is linked directly to its sales. It can improve a business’ profitability as owners and managers can pay suppliers early, buy in larger quantities and take advantage of any volume discounts that are available.

In addition, invoice financiers typically take a much more in-depth view of a business than other more traditional lenders and take into account its entire financial make-up when making a funding decision. An extensive credit history is not required, as the sales ledger of the business is used to secure funds. Bibby Financial Services is one lender in a strong position to be able to help firms improve their cash flow situation and weather the economic storm as it has recently secured a significantly enlarged funding facility.

What this effectively means is that unlike many other institutions and banks which are tightening their belts to cope with the current economic climate, Bibby Financial Services’ doors are very much open for business.

We support the Government in its attempts to attract more businesses to the credit insurance scheme, but the fact is, take-up remains low. Until the Government can offer even longer terms on this security then I believe take-up will remain low.
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