Britain’s small businesses are the backbone of our economy. When the lockdown ends, we need to help them get back on their feet to protect livelihoods and speed up economic recovery.
When the lockdown ends, Britain’s businesses will be less resilient than before. 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.
While their suppliers were confident in their customers' ability to pay before the crisis, the world has changed significantly.
We ask the government to provide this confidence by creating a backstop for trade so that businesses can trade their way out of the crisis.
Between 80% and 90% of companies in the UK buy and sell goods with trade credit, that means almost all business to business transactions. Trade credit is the loan that’s provided by one trader to another when goods or services are bought on credit. Usually, trade credit is provided for 30, 60 or 90 days, and no interest is accrued during this time. For many small businesses, trade credit is their only source of financing.
Providing trade credit can be risky but normally businesses have access to trade credit insurance to protect them. If a buyer doesn’t pay and becomes insolvent, the insurance company will pay out. This is important because an unpaid invoice can cause serious harm to a company’s bottom line. For example, the average UK business has a profit margin of 10%. An unpaid invoice of £15,000 would mean they’d have to make an extra £150,000 just to break even.
The problem is that the coronavirus crisis has increased insolvency risk significantly and insurance companies have had to put a limit on the amount of trade credit they can insure. Not by choice but because regulations require them to have enough money to cover losses. If they aren’t careful with their risk exposure in the crisis, it could endanger them too. With businesses not being to insure trade credit, trade will either grind to a halt or become riskier.
To overcome this problem, we want the Government to temporarily underwrite trade credit insurance policies, effectively providing a backstop for trade. A Government-backed scheme would allow the insurers to not cut or reduce the amount of trade credit they can cover. They would have to share their premiums with the Government but they would share the losses too.
In Germany, the government has already launched a similar scheme. In return for two-thirds of the insurance premiums, the German government will compensate the insurance companies for any losses. With access to trade credit insurance, businesses will feel more confident to buy or sell goods or services and this will allow them to trade their way out of the crisis.
The protection offered by trade credit insurance is now more important than ever. It can play a vital role in speeding up economic recovery and can help save people's livelihoods.
Barry supplies local shops, cafes and restaurants with fresh pastries and bread from his industrial bakery in Birmingham. He buys his ingredients from various wholesalers in the region, who all give him 30 days trade credit. With his business closed because of the lockdown, he’s had to throw away everything and he’s now running out of money to order more.
Without trade credit insurance
Shops, cafes and restaurants are some of the hardest-hit sectors and Barry’s suppliers are worried whether or not they’ll be able to pay Barry. It’s a fragile ecosystem of businesses. Because Barry’s suppliers can’t get trade credit insurance anymore and can’t afford an unpaid invoice, they ask Barry to pay upfront for his ingredients. Because Barry ran out of money and his customers can’t pay him upfront, he’s now unable to buy the ingredients he needs to reopen his business. This means he’s unable to trade.
With trade credit insurance
It’s a fragile ecosystem of businesses but between them Barry’s customers, Barry’s suppliers and Barry’s Bread employ 50 people. Because Barry’s suppliers can get trade credit insurance, Barry can order fresh ingredients to start baking again, earning some much-needed money. Meanwhile, people go to the shops, cafes and restaurants to buy the bread he supplies, helping those businesses make money. Barry’s suppliers are confident that they’ll get paid, no matter what.
We want to Get Britain Trading Again. Nimbla launched the campaign to highlight the dangers posed by the shrinking availability of trade credit insurance. Companies can share how the lack of trade credit insurance cover affects their business in a 2-minute survey. This will increase the Government’s visibility of this issue and encourage them to provide the backstop Britain needs to start trading again.