Lack of credit


Give them some credit


Lack of credit insurance suits neither vendors nor resellers

A recent report by the Confederation of British Industry (CBI) indicates that a lack of access to credit is directly responsible for the worsening employment situation in the UK and that the situation is likely to deteriorate in the coming months.

According to the CBI’s research 63 percent of firms who sought new finance said its availability had worsened in the last three months and a similar proportion (59 percent) expect it to deteriorate even further over the next three months.


The survey shows the very largest firms, employing over 5,000 staff, have been hardest hit by the credit crunch. Of the companies who sought new credit, most of the largest sized firms (82 percent) reported their access has deteriorated in the past three months, over half (57 percent) of large businesses and just under two-thirds (65 percent) of small and medium-sized firms (SMEs) say the same.


As well as the higher cost of borrowing, problems with trade credit insurance continue. Almost 40 percent of the firms surveyed by the CBI use the insurance to cover the supply of goods and two-thirds of these companies reported that its availability has worsened in the last three months, threatening their ability to secure contracts and supply customers. The survey also showed a widespread deterioration in the credit limit insured and the number of customers who covered.


Reports that Depot had had its credit insurance withdrawn in Europe led to an unprecedented statement to OPI from the office supplier – during the company’s ‘quiet period’ prior to its quarterly results – to allay fears that this could put a strain on the company’s cash position if suppliers demanded upfront payment for goods.


"Office Depot’s liquidity remains intact," confirmed spokesman Brian Levine, who also added that the company believes that it did not burn cash in its fourth quarter and that it would maintain its liquidity throughout 2009 "even under our most conservative projections of the economic environment".


UK wholesaler VOW (via Vasanta) is understood to have had its credit cover reduced, with rumours circulating that this has led to major supplier HP reducing its exposure to the company. In this month’s Big Interview, Vasanta Chief Executive Richard Martin has stated that VOW’s cash position is not threatened by credit insurance issues. Meanwhile, HP refused to make any comments related to credit insurance and payment terms with suppliers.


As well as the potential to undermine a reseller’s liquidity position, withdrawal and reduction of credit insurance is also putting strain on vendors whose cash flow is tied to their ability to benefit from confidential invoice discount (CID) facilities. CIDs are not normally available for customers who don’t have credit insurance.


Unless credit insurers are encouraged to rethink their risk strategies, the likelihood of more businesses going under because of this problem is increasing all the time. As well as providing high-profile bailouts for the banking sector, the UK government needs to quickly come up with a solution that eases the credit insurance crisis – one that helps as broad a number of businesses as possible before it is too late. A decision has been "imminent" since before Christmas. Now is the time to act.