Empowering Renewable Energy Growth: The Crucial Role of Trade Credit

The renewable energy sector has experienced remarkable growth in recent years,¹ driven by increasing awareness of environmental sustainability. There is also a growing need to transition away from fossil fuels. The proportion of heat from renewable sources, such as heat pumps, has increased in the UK, from 1.8% in 2007 to 7.3% in 2021. In 2022, 40% of electricity came from renewables.

Clean energy generation is central to the UK's plan to achieve net-zero emissions by 2050.² 

The Government has set a goal for energy providers to ensure that all electricity is sourced from 100% zero-carbon generation by 2035.

How trade credit can help facilitate growth

Trade credit is a valuable tool that enables renewable energy companies to manage their cash flow. Including solar and wind farms as well as anaerobic digestion plants.

It also helps them obtain essential resources and drive growth in a capital-intensive industry. It plays a pivotal role in supporting their expansion and sustainability. Additionally, it enhances their ability to compete effectively in a dynamic market.

Facilitating access to financing

The renewable energy industry requires substantial upfront capital for:

• infrastructure development; 
• equipment procurement; 
• and project execution. 

Trade credit allows renewable energy companies to buy the necessary materials and services without immediate cash payments. This enables them to initiate and scale their operations more quickly.

Trade credit also enhances the financial stability of renewable energy companies. These companies can manage their cash flow more effectively by deferring payment for goods and services. This helps them to allocate resources to critical areas such as research and development, project expansion, and maintenance. All of which contribute to sector growth.

What is trade credit insurance?

Trade credit insurance helps protect against customers failing to pay invoices issued on a credit basis. This means where the buyer pays later.

It safeguards against the risk of non-payment by their customers. In the energy sector, projects can be substantial and involve significant financial commitments. If a customer fails to pay or defaults on payments, it can significantly impact the company's cash flow. This in turn affects its financial stability.

However, trade credit insurance doesn't only help businesses operate when another company can't pay due to insolvency or lack of funds. It can also speed up growth by safeguarding cash flow. Plus, it could help a business to succeed when operating with unfamiliar customers.

Managing supply chains

Renewable energy projects often involve complex supply chains with multiple suppliers. These projects include solar and wind farms, as well as anaerobic digestion plants. Trade credit insurance can help mitigate the risks associated with supplier defaults or disruptions in the supply chain. This ensures that projects stay on track.

One of the primary challenges facing renewable energy projects is the high initial costs associated with equipment. This includes items such as solar panels, wind turbines, and energy storage systems. 

When suppliers have trade credit insurance, it provides renewable energy companies with a lifeline. This allows them to access vital equipment and technology on credit terms. This lowers the barriers to entry, making it easier for startups and small businesses to enter the renewable energy sector. As a result, they can contribute to its growth.

Protection for renewable energy businesses

This insurance doesn't just protect finances. It also gives banks and business partners peace of mind, knowing loans will be paid despite supply chain issues.

Maintaining strong relationships with customers and suppliers is essential for long-term success in the renewable energy sector. With this insurance, renewable energy businesses can offer credit terms to their loyal customers. They can also monitor any insolvency risks. When approaching new customers, the business can do so with confidence. They do not have to worry about late payments or insolvency issues.

Dealing with unpaid invoices

Non-payments and delays can significantly impact cash flow and operations. This puts a renewable energy business at risk.

In 2023, thousands of businesses in England and Wales went bust. Insolvencies increased by 10% compared to the previous year in the three months leading up to September 30, 2023.³

As businesses face the risk of shutting down, some may struggle to meet their obligations to renewable energy suppliers or service providers. They may need to delay payments to handle their finances.

Protecting your renewable energy business from trade credit risks

Trade credit insurance offers distinct benefits. Particularly in the areas of risk mitigation, growth, and enhancing working capital. In summary, for businesses in the renewable energy sector:

1. Risk Mitigation

• Helps protect businesses against the default of their customers. Reducing the risk of non-payment.
• Can enhance credit management by offering insights into the creditworthiness of potential customers.

2. Growth

• Can facilitate business expansion by enabling renewable energy companies to safely offer more competitive credit terms to new and existing customers.
• Helps increase confidence in exploring new markets or expanding the customer base without fear of significant financial loss.
• Helps secure better financing terms from banks. As insured receivables are often viewed as more secure collateral.

3. Enhancing working capital

• Can improve cash flow by protecting against late or non-payment. Ensuring more predictable income streams.
• Can lead to improved borrowing terms. As lenders may view businesses with insured receivables as lower risk.
• Allows businesses to release capital as a buffer against bad debts. Reallocating resources for growth and operational needs.

For more information about trade credit insurance, visit our trade credit page.

Sources

1. lse.ac.uk/how-much-do-renewables-contribute-to-the-uks-energy-mix-and-what-policies-support-their-expansion 
2. gov.uk/plans-unveiled-to-decarbonise-uk-power-system-by-2035 
3. gov.uk/commentary-company-insolvency-statistics-july-to-september-2023