Trade credit insurance payments hit Sh290bn

The world’s post-financial crisis decade, the Great Recession, has seen trade credit insurance move from a nascent and niche position to mainstream usage in the West, in a take-off that has sharply shifted buyer behaviour on late payments.

In the six years from 2009, the value of payments insured as trade credit grew by more than 53 per cent, to over Euros 2.35 billion. However, the take-off has been far stronger in some nations due to the variation in attitudes and habits around trade credit.

In Germany and France, for instance, very few SMEs use or offer trade credit — at barely more than one-in-six — with payments predominantly made at the moment of purchase.

But in the UK, 60 per cent of SMEs use trade credit, in an aggregate sum of credit that is more than 20 per cent larger than all of the country’s bank loans, and accounts for 80 per cent of all company finance.

This scale in the UK has created a climate of extreme vulnerability to late payments and far greater attention to trade credit risk.

For, despite the legal cap of 60-day on private sector payment terms and 30 days on public sector buying — and interest penalties for late payers — late payment is not illegal and has remained frequent.

This has, thus, generated a vigorous ‘risk’ market, which has now penetrated the corporate sector to the extent that it is driving change in British corporate credit and payment behaviour.

As it is, for businesses to continue to be able to access banking loans or other finance, they must often now demonstrate that they have only extended credit to low-risk customers, and, preferably, that they have insured against losses on that risk.

This has introduced a resistance by suppliers to extending credit at all, which, by contrast, in Kenya, is deemed as an automatic right and entitlement by most corporate buyers and procurement departments.

In the UK, the burden of proof has, instead, moved to the client seeking credit to demonstrate their payment track record and financial solidity to secure credit terms.

Moreover, insurers, who issued 11,900 corporate trade credit policies in 2016, now play a role in setting a credit cap on clients, by carrying out financial assessments. So, for instance, a company may be told that it can offer credit of up to the equivalent of Sh1 million, but beyond that, the credit will not be insured.

This cap is critical, as it tends to be a total that suppliers are reluctant to move beyond, meaning extra purchasing must be pre-paid.

For insured amounts, where payments are more than 90 days overdue, they are classed as a protracted default, triggering insurer payout of up to 95 per cent of the insured sum.

But any buyer that triggers an insurer pay-out on its unpaid invoices is unlikely to be approved for cover again, meaning that an extended default can mark the end of all of its cover for trade credit.

This, of itself, has begun to bring discipline to business-to-business payments, as late payments that may still fall far short of the extended default deadline can additionally see a buyers’ credit rating reduced, and credit caps reduced.

Such cuts have sent clear signals to the effect that financial underperformance and deteriorating supplier payments can push companies to pre-payment not just on a particular insured contract, but, sometimes, across the board.

In recent months, this has been a pressing concern for the UK’s High Street stores, many of which are ailing financially, as their late payment tail to suppliers has ballooned, seeing their credit ratings cut, and enforcing pre-payment when their cashflow is already at its most strained.

The leading insurer in the trade credit market is Euler Hermes.

READ: Companies face heavy penalties for delaying paying suppliers

Its decision in January to cancel all credit cover for suppliers to British High Street and online clothing retailer One Look made headlines, while insurer QBE simultaneously reduced the level of cover on credit terms extended to the store.

A month earlier, the industry marked the reduction of cover by insurer Atradius on South African-owned retailer Poundland.

In Kenya, trade credit is still at its earliest stages, launched by, for instance, Heritage Insurance, just five months ago, in October 2017.

The product has also been adapted from the outset to Kenya’s severe late payment norms, with a payment not classed as a protracted default until 180 days, or six months, after its due date.

At that point, the amount the insurer will settle is 80 per cent.

-African Laughter