Hopes that credit insurance scheme will boost cashflow

The government has introduced its trade credit insurance scheme in the hope that it will ease cashflow problems for firms.

As part of the Working Capital Scheme, and announced in the Budget, the aim of the measure is to provide up to £5 billion of additional trade credit insurance to businesses that have suffered reductions in their level of cover.

Credit insurance is vital as it protects suppliers, who sell on credit to other businesses, against the risk that they may not get paid.

In many cases, if credit insurance is lowered or withdrawn, supplier firms are forced to demand upfront payments, adding yet more pressure to the cashflow of customer businesses.

Under the government scheme, as from 1 May until 31 December this year, UK businesses will be able to purchase six months’ ‘top-up’ insurance from the government if credit limits on their UK customers are reduced. The qualifying window will be backdated to include any reductions since 1 April.

Businesses can buy the government-backed insurance to restore cover to the original level or double the amount they are able to obtain from the private sector up to the value of £1 million, whichever is the lower.

Lord Mandelson, the Business Secretary, said: “This scheme will provide a much needed breathing space for businesses suffering as a result of the reduction in trade credit insurance.

“We will not prop up bad businesses or take unacceptably high risks, but will provide targeted support to address specific challenges that businesses are facing and help maintain supply chains.”

The measure won support from Richard Lambert, the director general of the CBI, who said: “The sudden and often unexpected withdrawal of trade credit insurance has been causing real headaches for firms who depend on this cover to go about their day-to-day to business.

“Much of the pain could have been avoided by earlier intervention, but this targeted ‘top up’ scheme will provide welcome relief for some companies facing short-term working capital constraints and help restore confidence in supply chains.”

But Phil Orford, the chief executive of the Forum of private Business (FPB), argued that the scheme would be limited in its benefits as many firms are struggling to get cover of any kind since the availability of insurance has been squeezed by the recession.

Mr Orford said: “Many businesses will not qualify for the new £5 billion credit insurance scheme, which is temporary (it will come into effect on 1 May and cease taking applications on 31 December 2009), and will only be available for businesses that have had their credit insurance cut from 1 April 2009. Companies which have had it withdrawn completely will not be covered.”