On January 6th, in my post about HMV, I commented that the issue for SMEs will be what happens if or when the insurers pull cover:
When a big retailer sneezes it is the suppliers that catch the flu. The debt insurers will pull their cover. The banks will then pull any financing, discounting or factoring that will be underpinned by that insurance. The retailer will increase their terms and the supplier will suffer a major working capital crisis.
Unfortunately, it would appear that I am correct. Robert Peston’s Blog has reported that cover has been pulled for new invoices. In it he quotes from an email sent to one of HMV’s suppliers:
“I need to advise you that our credit insurers have significantly reduced our insured credit limit on all HMV entities. Based on the current HMV balances, the limit is not sufficient to support any sales on an insured basis moving forward.
So, why is this an issue?
A recent government report on SMEs highlighted a couple of interesting points:
Over a twelve month period, one-in-four SMEs went to their bank to borrow money. That may not seem like a large percentage but bear in mind that each year a different 25% will be going to the bank to access / renew facilities that last for up to 5 years. The same report also stated that over 70% of all finance (over 80% for overdrafts) was for working capital. These numbers show us that a majority of SMEs in the UK rely on their bank to fund their working capital. Now, a bank needs some security and, for working capital, this often means insisting that the debts are backed by insurance.
Lose your credit insurance and you run a serious risk of your bank removing your working capital.