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Trade credit: Enabling growth in the retail sector

Trade credit insurance can provide an opportunity for retail businesses to review their balance sheet and current cash position and enable growth.

People and double decker red bus cross Oxford Circus, the busy intersection of Oxford Street and Regent Street in the West End of London
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By Robert Butler , 

Practice Leader, Birmingham Trade Credit

03/03/2023 · 3-minute read

The UK retail market continues to be plagued by various issues. Recent seasonal sales statistics have provided further indication that retailers suffered markedly over 2022. This decline exposes the inability of the retail market to counter the succession of difficulties that last year presented. Inflation and a cost of living crisis have had a deleterious effect on consumers’ purchasing power and beyond this, rising interest rates have eroded profitability. Trade credit insurance is an option for organisations looking to negate these pressures. This is a useful tool for facilitating trade and can enable retailers to protect and sustain their companies’ growth for 2023 and beyond.  

Christmas 2022

The changing economic headwinds of 2022 negatively affected UK retail. Inflation has emerged as one of the biggest issues for trade and numerous central banks are struggling to tame it through the raising of interest rates. Rising labour and energy costs have only exacerbated these problems further. In the 12 weeks leading up to Christmas, consumers spent a record-breaking £12.8 billion on groceries — an increase of £1.1 billion on the corresponding period in 2021. However, this isn’t an indication of growing consumer confidence, but rather the result of high inflation. Grocery inflation had soared to 14.4% during December 2022. Volume based sales were actually down by 1% year-on-year, revealing the challenges shoppers face.

Over Christmas, 63% of households relied on credit cards or overdrafts to mitigate the effects of the cost of living crisis. Consumer reliance on credit is a growing trend. This is compounded by energy prices likely remaining above pre-pandemic levels, as the UK grapples with restructuring its energy sources during the ongoing Russia-Ukraine conflict.  An inevitable consequence from these problems is insolvencies. Year-on-year data reveals that in January 2023 insolvency rates climbed by 11% in the retail sector compared to pre-pandemic levels, with all businesses from the wider UK economy seeing insolvencies soar by 30%.

Trade Credit Insurance

In the face of further economic uncertainty, trade credit insurance could provide the required support businesses need to grow securely — for this year and beyond. Statistics reveal that sales fell by 5.1% in comparison with January 2022, as retailers ‘battle’ to win over price-conscious shoppers. Currently, only 1% of UK companies hold trade credit insurance. It is prudent with current economic conditions to explore all possible options to improve resilience.

Trade credit insurance – as well as protecting against B2B transactions - can provide an opportunity for businesses to review their balance sheet and current cash position. This adds strength for organisations negotiating with lenders. As a company de-risks itself and consolidates its security, it subsequently becomes more attractive for financiers. Although Christmas wasn’t the catastrophe that many feared, it left few causes for optimism for the ensuing months. The shedding of 15,000 retail jobs already in 2023 highlight the difficult circumstances UK retailers are dealing with. 

Looking Forward

As 2023 progresses, retail demand is set to weaken further as consumer confidence closes in on record lows. The pressure on household budgets will intensify as Christmas credit card bills arrive and further fixed interest rate mortgages expire. Consumers, from April, also have to contend with scaled back government support on household energy bills. The British Retail Consortium warned that once the government also withdraws energy support from retailers too, further price rises will be ‘inevitable’. These factors will continue to severely negatively impact consumers’ ability to buy goods and services.

Businesses will face further barriers in accessing capital. The retail sector will likely need to contend with higher interest rates for the foreseeable future. The Bank of England raised interest rates – in the tenth consecutive hike – to reach 4.0%. As UK inflation remains ‘sticky’ and fails to drop below 10%, it is expected interest rates will not be cut for the foreseeable future. The affects from the aggressive raising of interest rates may not be fully felt for several more years. Consumers’ reduction in disposable income and the diminishing ability of businesses to fund more lending, have been the main catalysts to damage the profitability of the UK retail market.

Trade credit insurance can enable finance and mitigate risk. This can be an attractive option - for all sized businesses - to continue growing securely in the face of any economic disruption presented in 2023 and beyond. Companies should not merely survive the current economic chaos, but emerge in a stronger position when the macro-environment improves. Marsh Trade Credit commands great expertise and experience within this complex field. To find out more about our assistance offered, please contact your representative.

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