£5bn government trade credit scheme is branded a failure

by David Jetuah

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03 Dec 2009

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Only £18m has been claimed from a government-backed £5bn trade insurance fund, sparking claims the emergency scheme has failed and is in urgent need of reform.

The scheme has less than a month left to run, leading to calls for an extension.

After major retail collapses including Woolworths and Land of Leather, The Trade Credit Top-up scheme was billed in this year’s Budget as a vital lifeline in protecting businesses from client defaults.

However, the terms of the scheme have been panned for being too narrow and the disappointing take-up has seen industry figures brand the initiative a failure.

Edward Rimmer, chief executive at Bibby Financial Services – the UK’s largest company providing advances to businesses waiting on invoices, said: “The figures speak for themselves.

“This is a huge waste of funding. Furthermore, the scheme’s eligibility criteria contains a glaring omission – it doesn’t support businesses that have lost all of their insurance cover.

“Policies have been pulled en masse by insurers, and in some industries we have seen an unprecedented number of uninsured businesses who are now being forced to risk everything.”

Martin Williams, of credit ratings agency Graydon, said: “Credit insiders thought the top up scheme was ‘too little too late’ and was known to be too expensive for companies from its start.”

In August, the government reduced the premium cost of receiving the top-up from 2% to 1% of the cover value after an outcry from businesses.

But despite the changes, industry leaders still urge the government to prolong the initiative. “Unless the government extends the scheme until the end of the first half of 2010, at the very least, then these small businesses will have completely missed the boat through no fault of their own,” Rimmer said.

Fabrice Desnos, chief executive of Hermes UK, said:

"We believe the scheme could have been broader but its parameters were set by government based on its appetite for trade credit risks.

"The government in particular did not want to substitute itself to the private market by accepting risks the private market was not prepared to cover which we always thought to be a sensible and rational decision.”

During 2009, two out of three Euler Hermes UK clients have submitted a claim, Desnos said, "A fact that clearly demonstrates how much risks have sky rocketed in the period and how supportive Euler Hermes has been."

"Euler Hermes UK’s objective is to protect clients against these risks by promoting prudent and selective risk management policies. We are committed to continue to offer the best support and trade credit protection product to our clients as the recovery gathers pace," Desnos added.

The business department responded that the scheme was put in place to provide targeted, transitional support to businesses whose cover had been reduced and who needed support while they adjusted to new conditions.

“To date, 104 policies have been accepted for 72 suppliers and cover to the value of £18m has been issued. Many businesses have found other ways to adapt and thus have not needed to take up the government offer.”

IN OUR VIEW

The reaction from trade credit insurers to the financial crisis saw wholesale withdrawal or reduction of cover across entire sectors and the repercussions have been felt far and wide. They will argue that they are the alarm-ringers on company troubles, not the cause of it. They also predicted there would not be much take-up of the scheme and they have been proved right.

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