Credit Where It's Due

One of the biggest problems facing small businesses is the promise of getting paid. Even successful firms are having difficulties agreeing sufficient credit limits to get sustained growth. This is due to the fact that credit insurers are reining back their offerings.

One of the best ways to mitigate risk in business is to buy credit insurance on debts. This means that if I deal with a customer and they want to have a credit account to purchase from me, then I can buy insurance to cover that credit limit. The insurer will use credit rating data like Dun & Bradstreet and Experian to assess the risk itself, and then offer to insure an amount of that credit limit which means that should my customer go bust or not pay for another reason, the insurer pays the amount owed to me. If I choose to allow the customer to go above the credit limit agreed with the insurer, then the extra risk is all mine and it may even risk the insurance of the original agreed amount as it was a decision taken solely by me to increase the exposure.

Now credit insurers are getting much tougher as credit rating agencies are also assessing companies' net worth and credit history far harder. For those companies who do not have a decent balance sheet, good cashflow or good credit history, agencies are slashing ratings and this means that credit insurers are decreasing the levels of cover offered. Credit lines are shrinking fast and this means that even if we want to expand our sales, often the confidence is not shared by credit insurers and this limits opportunities to sell more.

This is really at the heart of the small business engine and while the Government focuses on credit into the mortgage market to kick start the economy, it is the confidence to trade amongst ourselves as businesses in the UK which is a far bigger problem. While we get much harping about global international trade and protectionism, the reality of the credit crunch and recession is much closer to home for most businesses.

Credit Initiatives

We have heard before that there has been the Enterprise Loan Guarantee Scheme which allows banks to offer loans with up to 75% of them guaranteed by the Government and how this is being abused by the banks to not offer new loans but cover existing debt. That was a poorly implemented scheme from the Dept. of the Business Secretary. The next move from this department is aimed at credit risk between businesses.

The British Chamber of Commerce (BCC) has been lobbying on behalf of SME companies for such a move as it is limiting companies' ability to survive let alone thrive in this economic crisis. The good news is that the Government is expected to announce in the forthcoming budget some measures to help remedy this. On a similar scheme offered to banks, it is envisaged that the Government will underwrite part of the credit risk for bad debt and allow credit insurance companies to be more liberal with their assessments and support.

Already though, many small businesses have pushed back as in order to qualify for this support there are tomes of forms to fill in and data to acquire which is firstly beyond the reach of most small companies and, secondly, an onerous burden of administration on them which they typically cannot afford the time to do. It seems the scheme is doomed from the start as it is once again geared toward larger companies that have the in-house resource or money to fund such vast increases in the administrative load.

Credit Where It's Due

The real issue that could arise is similar to the Enterprise Loan Guarantee scheme where banks have basically gone to existing customers, offered a small increase in current loans and then converted them to Government backed lending. It means little NEW credit facilities are being given but more of the old facilities are now heavily guaranteed by the Government, I mean, taxpayer. The credit insurance business could go exactly the same way if this is introduced in a similar manner. Far from increasing available credit, the credit insurers will simply pass more of the existing book of risk onto the Government and not increase credit limits much at all.

Let's hope we get credit where it's due.