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UK Government backstops credit insurance

Providing increased certainty for businesses to receive funding in the form of invoice financing.

Paul Surtees May 14, 2020

Why is this important for business owners?

Credit insurance protects supply chains, giving peace of mind to businesses that their invoices will be paid in the event of a default by their customers. It is also a crucial component of the financing of the supply chains via invoice financing. Where invoices are insured by highly credit rated (AA-) insurers such as Euler Hermes and Coface, invoice finance lenders will be free to lend. 

So, as business activity picks up as we emerge from lockdown, sales ledgers will grow providing a valuable asset to borrow against.  

 

The benefit of a strong credit insurance market 

Credit insurance in the UK has a significant role to play - providing cover to 13,000 suppliers over their 650,0000 customers. It provides cover for £171 billion of business activity in the UK and £350 billion including exports.

Whilst lenders globally are provisioning for bad debts as a result of Covid-19, so too are credit insurers facing huge claims on their credit insurance policies. 

In times of uncertainty, the availability of funding from lenders and cover from insurers decreases whilst costs increase. With claims on the insurers mounting, to reduce their risk, they would typically stop insuring and/or dramatically increase premiums. Neither of which are supportive of a resumption of the UK economy. 

John Glen, UK Economic Secretary announced on the 13th May that the government will provide reinsurance to the credit insurance sector protecting supply chains the length and breadth of the country. 

Whilst details are still to be finalised, credit insurers already in the market such as Euler and Coface will be able to onsell the credit risk they insure through the government’s reinsurance scheme. Selling the risk is vital - each insurer has a limit of risk against any given buyer, therefore selling risk on that name or sector enables them to “recharge” their risk limits. For example - whilst certain sectors like airlines or hotels would have been “safe” to insure historically, these sectors are under significant stress, as demand for protection against these names from suppliers increase, insurers hit their own risk limits and therefore stop providing additional cover, impacting SMEs directly - who would then have to assume the risk of supply and removes their ability to finance the cash flow gap of the 30, 60, 90 days via invoice finance. 

The government scheme will enable suppliers UK wide to de-risk via the available insurance. It will enable invoice finance to be a critical lending lever for the remainder of 2020. To gain some insight into when and how lenders across products will resume their activities, see our liquidity Oasis insight.

 

Different lending products are key to help businesses recover. Book in some time for a chat about how Capitalise can help you and your clients navigate the market. 

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