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Government Backs Trade Credit Insurance With £10bn Guarantee

Posted 3 months ago

Government Backs Trade Credit Insurance With £10bn Guarantee
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The government has announced that Trade Credit Insurance, which provides cover to business-to-business transactions, will receive up to £10bn of government guarantees in a further bid to tackle the economic impacts of Covid-19. 

The Trade Credit Reinsurance scheme, which has been agreed following extensive discussions with the insurance sector, will see the vast majority of Trade Credit Insurance coverage maintained across the UK.

Trade credit insurance is designed for a range of businesses, whether it be SMEs or multinational corporations, who sell goods or services on credit terms to other businesses, and is particularly important in industries such as retailing, where payment can take up to six months. 

When providing credit insurance, insurers may cover two types of risk that a business can include in their cover: commercial risk and political risk. The former may refer to a situation where a business’ customers are no longer able to pay outstanding invoices as a result of financial reasons, while the latter focuses on non-payment as a consequence of extenuating circumstances due to political events, such as natural disasters.  

Trade Credit Insurance underwrites an estimated £350bn of economic activity of more than 630,000 businesses in the UK each year. It insures suppliers selling goods against the company they are selling to defaulting on payment, giving businesses the confidence to trade with one another due to coronavirus and businesses struggling to pay bills, there is a risk of credit insurance being withdrawn or premiums increasing to unaffordable levels, which could cause serious issues for liquidity and working capital across business supply chains

The guarantees will support supply chains and help businesses during the coronavirus pandemic to trade with confidence, safe in the knowledge that they will be protected if a customer defaults or delays on payment.

Business Secretary Alok Sharma said: “Trade Credit Insurance is a daily necessity for hundreds of thousands of businesses across the UK – particularly those in non-service sectors such as the manufacturing and construction sectors.

“Our £10 billion guarantee gives peace of mind to businesses, allowing them to continue to trade and maintaining liquidity in supply chains. This reinsurance scheme is an important step as we carefully set about firing up our economy as we emerge from the pandemic.” 

CEO of Nextfin, Sacha Bright commented: “This is important support for businesses who rely on trade credit. Many businesses may be able to relate to the 2008 documentary titled: Bank on Dave, which was headed up by a successful frustrated businessman who sold and finance minibuses through banks to local authorities and successful companies, many of which, due to the financial crash failed credit checks through no fault of their own, resulting in his business being placed on pause overnight. Tens of thousands of businesses went bankrupt across the country because their customers failed credit applications. 

“The introduction of this scheme will, I hope, enable businesses whose business model relies on trade credit to stay protected through the crisis.”

Author: Sacha Bright & Oliver Murphy

Disclaimer

To the best of our knowledge, the information we have provided is correct at the time of publishing. Sacha Bright is not a solicitor or accountant and we recommend that you seek professional advice on any topic discussed. Nextfin is not liable for any damages arising from the use of or inability to use this site or any material contained in it, or from any action taken as a result of using the site.  



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