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Trade Credit: Impact of Extended UK Government Support


In his recent budget, the Chancellor set out new measures to help businesses and jobs. The Government’s tax and spending plans for the year ahead are primed to support the UK’s long-term economic recovery.

The rate of insolvencies has been stable over the course of the COVID pandemic. The monthly Government insolvency statistics show that the total number of company insolvencies in the 10 months post-lockdown is down an estimated 35% compared to the 10 months pre-lockdown in March 2020. Not only have businesses been offered significant financial support from the Government in response to COVID-19, there have been temporary legal changes made within the Corporate Insolvency and Governance Act 2020, such as the temporary suspension of the use of statutory demands and winding up petitions. This change was intended to reduce the number of companies starting insolvency proceedings and to avoid overwhelming the courts.

Measures taken to avoid the liquidation of viable businesses, however, have also created opportunities for unviable businesses to survive. The zombification of the economy is not new and started before the COVID-19 pandemic, but the crisis has intensified the scenario. It is now difficult to distinguish between viable and unviable businesses in distress. An unviable business — or a “zombie” company — is a term used for a business that functions on a day-to-day basis, but cannot pay off their debt in full, or find cash to invest or grow their business; they are often reliant on government loans or other cash injections to survive.

The extension of the business support from the Government (such as the Recovery Loan Scheme, VAT Deferral Scheme, and Coronavirus Job Retention Scheme) as part of the 2021 budget, means that this cycle may continue — and invariably there will be a fallout when the support from the Government is withdrawn. This could possibly result in a spike in the number of UK insolvencies in Q4/Q1 2022 as suggested by Euler Hermes.

Marsh’s main advice for businesses is not to be lured into a false sense of security. Businesses are encouraged to consider the longer term impact of the pandemic when the Government support comes to an end. Deferred debts will be due after financial reprieves have ceased, and interest has continued to accumulate over the pandemic period. In addition, due to declining sales and financial obligations, some businesses may not have enough cash to support the return of their workforce when the furlough scheme ends. Making early decisions on the creditworthiness of your customers will be key. Analyse up to date financial information available on a business more forensically and frequently. Engage with your broker early in the process — they can advise of any information required by your credit insurer to not only write cover, but they can also identify and steer you away from any potential bad debts.

Trade Credit Reinsurance Scheme

What you may not see within the publicised summaries of the budget is the following comments on the Trade Credit Reinsurance Scheme. It advises as follows:

“The Trade Credit Reinsurance scheme has successfully maintained the vast majority of trade credit insurance coverage across the market throughout the pandemic, across the whole of the UK. Up to £190 billion of cover on around half a million businesses has been provided under the scheme.

The Government will continue to review the impacts of the scheme to assess whether there is a case for further interventions beyond the scheduled end date of 30 June 2021, in order to minimise disruptions in insurance coverage as the economy recovers.”

Budget 2021 document page 49, point 2.50

Marsh Trade Credit are working closely to monitor the Scheme and the benefits of this for all our clients. We are also working closely with the insurance market to maintain good communication with regard to their decision-making during the pandemic.