A lack of credit insurance forms part of the long dark shadow cast by the credit crunch which is often overlooked in favour of more headline-grabbing issues such as bank insolvencies and the consumer spending collapse.
But the effects of a lack of credit insurance, which protects businesses from the risk the companies they supply will default on payments, can be just as pernicious as missing bank finance as it effectively makes it too risky for companies to provide goods on credit.
This can then result in companies insisting on trading on a cash-only basis or introducing much more restrictive payment terms, squeezing growth in the economy.
And its withdrawal creates a ripple effect from the top to the bottom of the supply chain with companies lower down getting into difficulties because of problems at the firms they supply to.
Many firms have been crippled by the withdrawal of trade credit insurance – especially in high-risk sectors such as retail, manufacturing and construction – since the start of the recession.
A decision by insurers to withdraw cover from suppliers to Woolworths hastened the demise of the high street icon at the end of last year as it was forced into more onerous payment terms, draining its cash resources.
Jeegar Kakkad, senior economist at manufacturing organisation EEF which has been lobbying government to tackle the problem of credit insurance, said: “Credit constraints have made credit insurance a problem. It’s not like house or content insurance.
“If credit insurance disappears then it becomes more difficult to do business and get loans from banks.”
In his letter to Lord Mandelson, Mark Ashwell, owner and director of Steel & Alloy Holdings, described the “domino effect” the withdrawal of credit insurance can have on the supply chain.
“Without credit insurance any business downstream in the supply chain can easily cause a domino effect, taking down all of the businesses further up the supply chain and multiplying the negative effects on the economy many times over with catastrophic results,” he said.
He added: “Without credit insurance, liquidity and confidence in dealing with customers is lost as there is no longer certainty of payment on the money that has effectively been ‘lent’. This stops business from wanting to trade and paralyses the market.”