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Budget 2009: Credit insurance scheme - good but not good enough, say small firms

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22nd Apr 2009
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A new scheme to enable them to purchase 'top-up'trade credit insurance from the government if credit limits on their UK customers are reduced has received a cool reception from UK business commentators.

The scheme, announced in conjunction with the chancellor's 2009 budget speech, will provide up to £5 billion of extra insurance as part of the Working Capital Scheme to help mitigate cash flow problems.

Trade credit insurance protects suppliers who sell goods on credit to companies, such as retailers, against the risk they will not get paid. If credit insurance is withdrawn, suppliers demand to be paid upfront.

This can leave retailers short of stock, create cash flow problems for retailers and cost jobs as retailers seek to divert funds from wages to paying suppliers. Banks also use retailers' insurability as one of the criteria for making lending decisions.

"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," said Richard Lambert, CBI Director-General.

However, from May 1 until December 31 this year, SMEs will be able to buy six months of "top up" insurance from the government. The scheme only applies to credit reductions suffered from April 1 this year, and businesses which have had credit cover withdrawn completely will not be eligible.

"Much of the pain could have been avoided by earlier intervention," added Lambert. "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."

The move however failed to impress Phil Orford, Chief Executive of the Forum of Private Business (FPB), who pointed to the many businesses of all sizes finding it is impossible to get any credit insurance cover at all. "The actions of the credit insurers makes it increasingly more difficult for our members to do business with other companies and to protect themselves against increasing instances of late and defaulted payments," he told BusinessZone.co.uk.

The scheme will do little to help businesses which are already struggling, he added. "The measures will only be of assistance to firms which have had their credit insurance partially withdrawn from 1 April onwards," he said. "This will not be of any use companies which continue to operate with healthy order books and yet want to insure their businesses against cash flow issues."

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA), however welcomed the scheme, saying it would bring some much-needed stability to a system that often fails when credit dries up.

"Ensuring the chain stays strong is a timely measure, one that should have been introduced earlier," he said. "This is a definite win for the SME sector, which is so dependent on stable cash flow."

Gilbert Toppin, chief executive of the EEF manufacturers' association agreed that the chancellor had gone some way to alleviating the short term pressures facing SMEs, but added that he 'should have gone further to make a real difference'.

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