By Mark Whiteley, Director of Xenia Broking Group Ltd

Many businesses might feel that during the heart of the Covid-19 pandemic and its recent aftermath we saw the very worst of what the economy had to throw at us. The coronavirus has been tough on UK businesses and livelihoods, wreaking havoc on sectors such as travel and hospitality, with planes grounded and pubs and restaurants closed for months on end.

While the 2022 outlook may look more optimistic, unfortunately, the likelihood is that what we have seen so far is merely the tip of the iceberg. We need to brace ourselves for more difficult times ahead.

This is why trade credit insurance is becoming more important. It protects businesses over the eventuality of customer insolvency – compensating them on lost income should their clients or suppliers go out of business before goods are delivered or invoices paid. Until recently this was an often-overlooked service, but the perfect storm of market conditions is causing more finance directors to put this form of protection high on their spending list. Below I’ve outlined the five reasons for this.

1. Insolvencies are at artificial lows

If you look at official figures, the picture may seem to show that the widely expected number of company failures did not materialise last year. Instead, global insolvencies actually fell in 2020 by 14%, (according to research by European-based trade credit insurer Altradius).

However, in my view, this is because many of the world’s governments’ support initiatives have had the unfortunate effect of masking the problems and in fact many failures are on their way. Other research by Euler Hermes recently found that state aid prevented as many as one out of two company failures in Western Europe and one out of three in the US.

While supported by state aid programmes, many companies experiencing cash-flow difficulties did not have to go cap in hand to their banks for help and, as such, have been artificially able to mask their financial problems.

2. Winding up petitions have resumed after Covid

In the UK usually, when a company is unable to refinance or agree a recovery package with its creditors, Creditors and/or HMRC issues a winding up petition against the business. However, during the height of the Covid-19 pandemic, this protocol was suspended, along with the introduction of the furlough scheme and various Government loan programmes for businesses. Now, that winding up protocol has been reinstated and, as such, the reality is that we are likely to see many more company insolvencies in the year to come.

3. Gas price hikes causing cash flow issues

The aftermath of Covid-19 is not the only challenge facing British businesses right now. Firms are also struggling with gas prices hikes. This means that for firms with a heavy energy usage, such as any manufacturing company, they face price increases of as much as 200%. If they are unable to absorb these costs, they will be forced to pass them onto their customers who may go elsewhere. The problem is that they will not be able to pass the cost on in time for the imminent price hike, which will cause cash flow problems and in turn could cause many businesses to fail before they get these costs back.

4. Supply chain bottlenecks causing cash flow issues

In addition, supply chain bottlenecks due to Brexit and the blockage of the Suez Canal in the summer are providing a headache for importers. They are forced to wait for their goods and pay thousands of pounds extra for container shipping transportation as ships are rerouted. It will be difficult to ensure products are on the shelves and available for Black Friday and Christmas which many businesses rely upon. And worse, it remains uncertain whether companies will be able to make a profit on the goods they can sell after paying the additional shipping costs. Even if they can pass this extra cost onto consumers by raising prices, the problem remains that they are unlikely to pass the cost on in time to settle the sudden extra fees. So, more working capital pressures. In retail, where profit margins are slim, this is likely to be most problematic.

5. Driver shortages mean scale of sales is reduced

Meanwhile, staff and HGV driver shortages due to the impact of Brexit and other issues is making it difficult for firms to sell or transport the volume of products they need to remain profitable. For example, in food production, many businesses don’t currently have enough casual staff available to pick and pack their goods. Logistic businesses are having to pay increased wages to retain staff. Without the cash generated by profitable sales many businesses will need to raise additional funds.

These five reasons amount to unprecedented tough times ahead. Already the numbers of insolvencies are creeping up.  According to the UK’s Insolvency Service, there were 1,446 insolvencies across England and Wales in September 2021, up from 1,349 in August, and 928 from the same time last year. In fact, the number of UK businesses that registered as insolvent in September was the highest since the pandemic began. Atradius estimates that UK company failures will spike by 30% to over 20,000 in 2022.

Two things companies can do to protect themselves is to firstly ensure that they have trade credit insurance, and secondly have as much market intelligence at their fingertips as they can. As part of our trade credit brokerage service, we conduct quality credit check information for our clients on their customers so they can have peace of mind and more crucially, the confidence to expand without the risk of bad debts. Implementing a trade credit insurance policy from specialists who know this market well is now an essential, rather than a nice-to-have protection.