Probably the least well known of the government support schemes could be the most important for restarting the UK economy. The trade credit reinsurance scheme enables businesses to continue to trade with each other and generate revenue despite skyrocketing risk and uncertainty.
Following the 2008 financial crisis, it took seven years for lending to SMEs to return to pre-crisis levels. The exorbitant risk of defaults naturally made the business community uncomfortable offering credit, and the resulting ‘credit crunch’ slowed economic recovery considerably. Through the reinsurance scheme, businesses can continue to affordably insure their trade against customer defaults on payment. But trade credit insurance is arguably still an under utilised enabler of economic recovery.
When trading resumes after the lockdown, small businesses in Britain’s shops, restaurants, pubs, and other SMEs will need credit terms to get back on their feet and understandably, suppliers will be worried about their buyers’ ability to pay. Once reliable trading partners will now be far less creditworthy. The collapse of monoliths like Arcadia Group, (the fashion retailer has left its suppliers with approximately £250 million of unpaid invoices late last year) demonstrates that even corporates aren’t impervious to market shocks. Besides their depleted cash reserves, firms are likely to be hampered by the ongoing market uncertainty, which Brexit has only amplified.
Trade credit insurance can help to rebuild resilience in supply chains disrupted by the pandemic, and provide a bulwark against insolvency contagion risk. Unchecked, insolvencies could flow through entire supply chains, especially within closely networked SME ecosystems. Credit insurance can protect against this systemic risk, and make it safe for businesses to continue trading with partners that are facing cash flow challenges. These trading decisions are likely to make or break business relationships in the longer term.
Loans are an unsustainable solution to the debt burden, with 35-60% of borrowers likely to default on their loans in the next 12 months according to the Department of Business, Energy and Industrial Strategy (BEIS). Over reliance on government loan schemes could also lead to overleveraging, effectively putting the economy into hibernation. In contrast, trade credit insurance could offer a more sustainable alternative, in that it encourages trade to continue, and channels cash through viable companies.
Innovation will also be essential to succeeding in the new environment. The pandemic radically shifted customer spending, with businesses scrambling to move online to compensate for the lack of footfall. Rather than hampering new shoots with a hefty debt burden, the small businesses that are still trading can lean on trade credit debt as they adapt to the new market conditions and increase their revenue. A re-activation of operations in this new trading environment would increase revenues and help businesses repay their CBILS and BBLS.
Buckling down and hoping for the pandemic to pass is not a viable option for businesses. Thankfully, technological development has resulted in the arrival of a plethora of fintech solutions that can help SMEs to protect themselves against risk, access finance and pivot successfully. Like the virus, we must mutate, and those agile enough to grasp the opportunities in the new market will prosper.