The economic environment has created tough conditions for UK businesses in recent years. Heightened inflation, high-interest rates, and a lack of consumer confidence have all taken their toll on trade.1
The 2023 UK Business Risk Report found that financial uncertainty was the top risk facing businesses. Just over one-third of UK business leaders cited it as a significant cause of concern. Meanwhile, statistics from The Insolvency Service show that company insolvencies in England and Wales recently hit a 30-year high.2
As businesses grapple with uncertainty, they may consider trade credit insurance. This can provide an attractive option for growing securely and mitigating credit risk when faced with economic disruption.
Countering high inflation and interest rates
High inflation has affected many businesses in the UK. 3 Consumer spending has slowed as the cost of goods and services has increased.
According to the Bank of England,4 three factors have caused high inflation in the UK:
1. The COVID-19 pandemic
Many businesses suffered considerable financial losses and operational disruption during the pandemic. Recovery efforts continue to strain these businesses.
2. The Russia-Ukraine conflict
The economic side effects of the conflict include higher energy and food prices.
3. Worker shortage
Many people did not return to work after the pandemic.4 The shortage of workers has pushed up wages. As a result some businesses have increased the prices of their goods and services. Other potential reasons for the worker shortage include:5
- Brexit;
- health complication;
- and older people retiring early.
Inflation steadily eased in 2023, from its peak at 11.1% in October 2022.6 Yet, the Bank of England remains cautious on expectations of when interest rates may return to around 2%.4
The Bank of England can influence inflation to some degree by raising interest rates. But other factors, such as geopolitical risks, are outside its control.
The current environment of higher inflation and borrowing costs has added to businesses’ financial pressures. When interest rates are low, businesses may be more willing to extend credit to customers, as the cost of borrowing is lower. Conversely, higher interest rates can increase the cost of credit and make businesses more cautious.
Trade credit insurance could provide the required support organisations need to grow securely. Insuring the amount of income still waiting to be paid through outstanding invoices can help you get improved terms from funders. This could strengthen your business in high-inflation environments.
Late and non-payment risks
Slower global economic growth, high energy prices, inflation, and soaring interest rates have made delayed payments or non-payment for goods and services more likely.
Late payments can cost your business time and money, but there are measures you can take to reduce this risk. These include:
- Ensuring your credit management system is up to date. Credit checks on new customers, ongoing checks, and examinations of company accounts should be conducted as necessary.
- Negotiating clear payment terms and reminders and set credit limits. This gives customers ample time to meet their financial obligations.
- Motivating customers with incentives, such as discounts, when payment deadlines are met.
- Considering how trade credit insurance can cover both the losses faced by businesses when outstanding invoices go unpaid and the solicitors’ fees incurred when pursuing bad debt.
Creating supply chain resilience
Supply challenges have been exacerbated by the difficult economic landscape. This situation has put unprecedented pressures on businesses. Most businesses in supply chains are reliant on financially healthy suppliers and customers to keep their own business on an even keel. The domino effect created if these companies go under can have ramifications for many suppliers.
Trade credit insurance can help businesses be more resilient by providing specific cover for agreements and commerce with suppliers. It can also provide cover for financial losses when customers are unable to pay for purchases.
By taking a strategic approach to supply chain management, firms can proactively protect themselves from supplier insolvencies. This can involve several key actions:
1. Conducting due diligence
It's important to verify that companies in your supply chain are legitimate and financially stable. Choosing suppliers that are of a similar size and share similar values and visions can help ensure that your goals are aligned.
2. Ensuring diversification and flexibility
Having more than one supplier provides alternatives in case issues arise. This diversification helps mitigate risks associated with relying on a single source.
3. Fostering relationships
Building strong relationships with suppliers and customers can create new business opportunities. Collaborating with these partners allows firms to overcome challenges, expand into new markets, and identify potential problems early on.
Identifying supplier risks
Suppliers may not always be keen to share their business concerns. But there are warning signs to look out for that can indicate potential problems ahead. Indications a company might be heading towards insolvency may include:
- Reduced communication.
- A deterioration in service.
- Inconsistent stock levels.
If you suspect that your supplier may be facing difficulties, you can take action to establish the seriousness of the situation and protect your business. For instance, you can engage with your suppliers to try to find a solution. You may also consider renegotiating terms, and seeking legal action if necessary.
Protecting your business with trade credit insurance
1. Alleviating financial uncertainty
In the 2023 UK Business Risk Report, 46% of business leaders stated that insurance coverage has helped ease one of their main concerns. This concern is financial uncertainty, which they faced in the previous year.
2. Benefits of trade credit insurance
Trade credit offers many distinct benefits. Particularly in the areas of risk mitigation, growth, and enhancing working capital.
Businesses can be protected against default for customers trading on credit terms reducing the risk of invoice non-payment. In addition, it can enhance a company’s credit management. Insights into potential customers' credit ratings are just one of the valuable benefits you could receive from your provider.
3. Supporting business growth
Trade credit insurance can protect the business and support growth. It helps facilitate business expansion. This is achieved by enabling companies to safely offer more competitive credit terms to new and existing customers.
Insured parties feel more confident exploring new markets or expanding their customer base without fear of significant financial loss.
4. Improving financing terms
If financing is needed, trade credit insurance can reduce the risk for financial backers. This could result in the offer of improved financing terms.
5. Enhancing working capital
Finally, trade credit insurance enhances working capital by improving cash flow. It protects against late or non-payment and ensures more predictable income streams.
Looking ahead to new opportunities
Despite the tough economic conditions, there are reasons for optimism about the resilience of UK businesses. There is a renewed focus and confidence among their leaders.
According to the 2023 UK Business Report, business leaders are optimistic about the future. Fifty percent expect increased productivity, while 46% expect an improvement in profitability in 2024.
Businesses can plan, grow, and adapt to challenges and opportunities. This is achieved through a successful risk management strategy. This strategy should incorporate forecast planning, protect cash flow, and defend against supply chain challenges. It should also address cyber and environmental risks.
Explore more about trade credit.
Sources
1. theguardian.com/more-than-47000-uk-businesses-on-brink-of-collapse-warn-insolvency-experts
2. gov.uk/commentary-company-insolvency-statistics-october-to-december-2023
3. bbc.co.uk/news/business-68140635
4. bankofengland.co.uk/uk-inflation-since-the-pandemic-how-did-we-get-here-and-where-are-we-going-speech-by-jonathan-haskel.pdf
5. ukandeu.ac.uk/what-is-behind-the-uks-labour-shortage
6. ons.gov.uk/consumerpriceinflation/november2023
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