A multibillion-pound scheme to help thousands of companies that are struggling to secure crucial credit insurance will be announced by the Government later this month.
Retailers, electronics groups and motor manufacturers have all been threatened by the widespread withdrawal of credit insurance, a highly complex form of protection that allows businesses to trade with each other without worrying about unpaid bills. Business leaders believe that the “unprecedented” rate at which credit insurance is being cancelled or refused could be as devastating to industry as the credit crunch has been to the banking sector.
In recent months, well-known companies with financial difficulties have collapsed after the removal of credit insurance proved to be the last straw. Woolworths has been the biggest casualty.
Businesses that have had their credit insurance pared back include Peacocks, the fashion group, Focus DIY, Gala Coral and DSG International, the owner of Currys and PC World.
Credit insurance pays the policyholder for goods or services it provides if the buyer, such as a retailer, cannot make the payment. About two thirds of credit insurance customers are small businesses. These companies are already facing longer payment periods from bigger firms. In the past, invoices were settled within 30 days. Now a 150-day wait is not uncommon.
The Department for Business, Enterprise & Regulatory Reform would not be drawn on details of its scheme. However, it is understood that the Government will offer to cover up to 50 per cent of credit insurance payouts. An overall cap of £5billion for total claims is under consideration.
According to sources, the scheme will be offered to medium-risk companies whose cover has been reduced but not withdrawn entirely. The Government will underwrite half a potential payout and the credit insurer will cover the other half. The credit insurers will administer the plans, which will probably cost more than ordinary policies.
John Cridland, the deputy director-general of the CBI, told The Times: “For the companies affected, this is as big a problem as the credit crunch has been for the banks. It is particularly significant for the manufacturing supply chain.”
Three providers - two French-owned and one Dutch-owned — control four fifths of the UK credit insurance market, which provides cover for nearly £300billion of turnover. Euler Hermes is the market leader, both in the UK and globally, with 36 per cent of the global market. Atradius, Britain's second-largest credit insurer, recently withdrew cover from suppliers to 12,000 companies in a single week. Coface, the third-biggest, said that claims leapt by 39 per cent in 2008, mostly in its final three months.
Across the credit insurance sector as a whole, the total value of claims rose by 58 per cent in the third quarter of 2008, compared with 2007, reaching nearly £100 million, according to the Association of British Insurers.
Nick Palin, director of finance for the Forum of Private Business, said: “Trade credit insurance protects small businesses that are not being paid. Every day, more of their customers are forced to close because of the economic downturn, leaving them to foot the bill. Credit insurance companies are reacting nervously, and increasingly labelling small businesses as risky propositions. The consequences of them not providing the necessary levels of insurance could be disastrous for the small business sector and the economy.” Article Courtesy of "The Times"
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