The scheme is arguably one of the most effective and important support schemes introduced by the Government, yet perhaps oddly, has been one of the least publicised over the last three months. This may be because it is less tangible than the cost savings and cash injections businesses have been receiving; however, without it, the economic fallout could be far-reaching and extreme.
The Government launched the Trade Credit Reinsurance Scheme in June 2020, which
- Underwrites up to £10bn of Trade Credit Insurance (TCI) policies;
- Operates from 1 April 2020 to 31 December 2020 (with the potential for extension)
It is open to all TCI insurers currently operating within the UK market.
The scheme acts as a state-backed reinsurance policy for insurers and (subject to certain conditions) enables them to provide TCI where the private credit market is unable to do so.
It enables insurers to carry on providing trade credit insurance despite the COVID-19 pandemic.
Whilst the TCI scheme was announced in May 2020 it is yet to be implemented. It is understood the European Commission has objected to certain elements of the scheme on State Aid grounds, consequently, the scheme is not yet in operation.
We can see a real-world example of the severity of this issue. As a direct consequence of this, Coface, one of the largest credit insurers has withdrawn credit terms for a number of food and drink wholesalers, effectively meaning some wholesalers are now having to pay upfront for goods.
One case is reported to have lost a credit limit of £500k overnight, a significant cash gap.
It is easy to see how such loss of credit terms could create a “perfect storm” and a cash flow crisis as government support is withdrawn, as many wholesalers will already be managing significant wastage losses and bad debts as a result of lockdown.
Wholesale will not be the only industry affected, as noted above, TCI underpins the smooth operation of the UK supply chain. Ongoing delays will result in businesses facing a double-whammy of:
- Manage the cash impact of reduced or no credit terms; and
- Reduced availability of funding solutions to bridge any gap.
It is still hoped the state aid issues can be resolved quickly and the scheme will be introduced as planned, which will allow credit terms to return to more usual levels. However, the longer the delay, the more urgent the issue becomes.
The sooner the TCI scheme can be put in place the better.
What is trade credit insurance, and why is it so important?
TCI is an essential part of the UK supply chain and lending markets.
TCI is a quiet but critical foundation of the UK economy. The Government estimates that £350bn of UK economic activity is underwritten by TCI schemes with 630,000 businesses using TCI each year.
TCI is an insurance product which protects businesses against the risk of non-payment from customers. If the customer does not pay, the insured receives a pay-out under the policy. Larger insurance providers predominantly underwrite it.
By insuring themselves at a relatively low premium, many businesses and invoice finance lenders have confidence they will be paid, even if their customer is unable to do so.
TCI plays a vital role in the UK supply chain (both domestic and export) and in sectors such as recruitment and manufacturing, where payment terms will regularly be 90 days +. Many SMEs also rely on invoice finance as a source of working capital to bridge the gap between supply and payment.
The impact of COVID-19
COVID-19 and resulting uncertainty have had an immediate, negative impact on the revenues and cash flows on many UK businesses, increasing their credit risk profiles. As a result, TCI insurers were less able to offer terms on companies that are too high a risk, or premiums would have increased to such a level as to make them cost-prohibitive.
There are two main impacts:
- SMEs may not supply customers where they were not assured of payment or where the premium was too expensive;
- The lending market (particularly invoice finance) would be severely restricted as lenders would not advance funding without the protection of TCI.
If not addressed, there would have been a severe impact on liquidity and working capital rippling down the UK supply chain, caused by slower payments and lower levels of funding.
The impact would potentially cause a seizure of the UK supply chain, and a significant wave of business failures as cash reserves rapidly dwindled.
How can the scheme help?
- The scheme will maintain liquidity and working capital levels with the UK supply chain for thousands of UK businesses, by enabling them to access insurance pay-outs in the event of customer default, non-payment or insolvency;
- The scheme has “unlocked” the invoice finance market which had been temporarily constrained by the increased risk of lending without trade credit insurance. It has increased of invoice finance providers that are able to lend to SMEs (including taking on new customers and under the CBILS scheme).
Many SMEs will be forecasting or experiencing cash flow pressure due to COVID-19 through slower or lower revenues and the withdrawal of other government support schemes. These SMEs now have access to a broader range of funding options (including CBILS) as a result of the scheme.
For businesses that currently have (or are forecasting) a funding requirement/increase in working capital requirements possibly due to;
- Expansion or growth opportunities, during or post-pandemic;
- A restart and return to “normal” operations;
- Funding a longer-term turnaround and/or restructuring of existing funding facilities;
Invoice financing may well be an agile, cost-effective option, and one well worth considering. Thanks to the Trade Credit Insurance Scheme, it is back on the table.
This article was written by Tim Smith, at Price Bailey. If you have any questions regarding the Trade Credit Insurance Scheme or invoice finance funding, please contact Tim on the for form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.