The campaign, launched by insurtech Nimbla, warns of an “insolvency domino effect” and calls for additional government support for Britain’s 6 million SMEs.
The goal of the campaign is to give SMEs the confidence they need to resume trading when the lockdown ends.
After weeks of hardly any trade, Britain’s businesses will be less resilient than before and they will have less cash to withstand a loss. Most businesses won’t be able to pay upfront for the goods they need to reopen and get back on their feet so they will want to pay later using trade credit. Trade credit is when a customer pays for a product or service within a specified period rather than upfront.
Normally, businesses have access to trade credit insurance to protect the trade credit they provide. If a customer doesn’t pay and becomes insolvent, the insurance company will pay out. The crisis has increased insolvency risk significantly, and insurance companies have had to cap the amount of trade credit they can insure.
Nimbla Founder & CEO Flemming Bengtsen said: “When the lockdown ends, Britain will go back to work but doing business won’t be the same. Buyers will need credit terms to get back on their feet, and suppliers will be worried about their customers’ ability to pay. The SMEs supplying these buyers will be reluctant to do so in the absence of trade credit insurance.
“This deadlock means that supply chains will grind to a halt, economic recovery will be hampered, and many more companies will collapse if we do nothing. SMEs will be the most likely to suffer in this scenario.
“Take a business accepting an order from a customer who ordered regularly from them before the lockdown. The business wants to supply them, but they want 60 days of trade credit. How do they know they can pay? Although that company was economically viable before the crisis started, is it now? Companies can file their accounts late and trade as technically insolvent under new rules. More than likely, the supplier is far less able to absorb a loss than before and a customer becoming insolvent could drag them down as well. This could be the start of an insolvency domino effect with a devastating impact on the entire supply chain.”
To prevent this from happening, the campaigners call for a Government backstop for trade credit insurance. This would encourage businesses to trade their way out of the crisis by giving them access to insurance against the risk of customer insolvency.
Several EU countries, including Germany and France, already have similar schemes in place. The Association of British Insurers (ABI) has been in talks with ministers about a UK trade credit insurance scheme for some weeks. This group has been talking to the ABI about the specific concern for SMEs.
Photo by Scott Webb on Unsplash
