1 Managing trade credit risk in the recovering economy July 201
2 1 QBE - Managing trade credit risk in the recovering economy Introduction In our latest survey of UK businesses, 22% of respondents reported that their perceptions of trade credit risk had increased. In fact, the difference between those reporting an increase and those reporting a reduction (net balance) leapt from 9% in 2014 to 17% this year. The UK economy, despite many positive indicators, remains fragile. Certainly, 29% of respondents reported consumer or business confidence, and 26% cited current levels of demand, to be the aspects of economic outlook of most concern. In the Eurozone, as Greece continues to dominate the headlines, uncertainty and instability lie ahead. So is this a sign of heightened risk? Our findings suggest that businesses should be concerned about the creditworthiness of their buyers, given some undeniably concerning factors in play: 42% of respondents reported increased risk from competitor activity and market pricing 3% of respondents reported increased risk from volatility and trends in prices of material inputs and goods purchased 21% of respondents reported the lack of visibility of customer orders/revenue. It is early days to be sure if the concerns of our survey respondents herald a rise in business insolvencies, but for the sectors reporting the greatest concerns regarding trade credit risk - Manufacturing & Engineering and Building & Construction - there definitely has been an uptick in business failures of late with some high profile casualties. It may just need a combination of events an increase in interest rates or normalisation of oil prices to historic levels for instance - to tip the balance. Time we suggest for companies to consider whether they are fully protected. Trevor Williams Head of Trade Credit & Surety Europe
3 QBE - Managing trade credit risk in the recovering economy 2 Outlook for the UK economy + On the face of it, there is plenty to be positive about the UK economy. GDP is back to pre-crisis levels, the employment rate is at its highest level since the 1970s, inflation is at a record low and investment levels are rising. Growth in business investment is also strengthening, with rising capital expenditure and mergers and acquisitions activity on the rise. Almost six in ten (9%) businesses plan to recruit additional skilled staff in the next 12 months. Economists expect the recovery in the UK economy to be steady and sustained and most predict UK GDP to grow by around 2.% in 201, the strongest growth of the large European economies. But the road to full recovery is not expected to be smooth. Businesses responding to our survey in May 201 perceived a notable increase in the level of overall risk, strategic, market, operational and/or financial, they are experiencing with almost a third (31%) indicating that their operating environment is riskier now than six months prior. This trajectory of risk, synonymous with growing economies, is expected to continue with three in ten businesses anticipating that risk levels will rise in the coming six months. They further cite consumer or business confidence as the aspect of economic outlook which causes them most concern, closely followed by current levels of demand. Factors with the potential to limit UK economic activity include the comparatively low UK productivity levels and burgeoning national debt. For those trading outside the UK, global trade levels have yet to recover and economic outlooks are mixed: Growth in the Eurozone, the UK s largest trading partner, overall is likely to be weak in 201 and 2016, while financial turmoil continues to hinder growth in Southern Europe. As we go to press, no solution to the Greek debt crisis has been found and continues to weigh on uncertainty in the Eurozone. On 30 June Greece became the first ever developed economy not to pay back the International Monetary Fund. The US economy is expected to achieve relatively strong growth in 201 and 2016, while stronger Western economies like Canada and Germany should continue to recover. The outlook for emerging markets is also patchy. While economic growth in China is slowing, it still remains high at around 7%, a rate not enjoyed by the UK since the early 1970s. In contrast, Russia s economy is expected to shrink substantially as the lower oil price and sanctions bite, while falls in commodity prices are leaving economies, like Brazil and the Middle East, weak. Political risks in Russia/Ukraine and the Middle East, continue to create anxieties for global trade and uncertainty over commodity prices. Q: With which, if any, one aspect of the economic outlook in the UK do you currently have the most concern? Consumer or business confidence 29% Current levels of demand 26% The outlook for interest rates 16% The outlook for inflation 8% Uncertainty over the outcome of the General Election* Other issues (e.g. exchange rate/ competitiveness, competitive environment, oil prices, skills shortage)* % 7% *Issues raised spontaneously by respondents (as part of another aspect of the UK economic outlook ) NONE/No particular aspects of concern 9%
4 3 QBE - Managing trade credit risk in the recovering economy Concerns ahead UK interest rates There are risks inherent in a recovery, which can be just as challenging for businesses as trading through a downturn. Historical analysis shows that the time just after recession can be as damaging as the recession itself. Lender forbearance, which has been unusually high in this recovery, could wane, while cash flow, over expansion and a failure to invest add potential stresses and strains. The record low interest rates that have persisted at 0.% since 2009 have thrown distressed companies a life line and may have tempted some firms into higher levels of debt gearing than would be the case under normal economic circumstances. The spectre of higher levels of interest rates is looming. Economists are now predicting a gradual upward trend in interest rates, likely to begin in late 201 or early 2016, with an expectation of them reaching 2% by the end of 2017, gradually returning to a normal level of around 3.-4% by Low interest rates have helped struggling businesses meet their debt obligations, even if there is little or no chance of paying off all their debts in the foreseeable future. For many businesses, the forecast upward movement spells trouble. And the movement does not have to be huge for the impact to be felt. From research we carried out in 2014, we know that there is high sensitivity to even the smallest increase in interest rates. Some 23% of respondents indicated that an increase in interest rates of up to 0.% would have a tangible effect on their business, rising to 47% of respondents for a rate increase of up to 1.%. Over eight in ten companies believe that a gradual increase in the Bank base rate over the next two to three years will affect their businesses, such as a more cautious approach to spending (cited by 48%), an increased focus on working capital and cash flow (48%). Trade credit risk The particular nature of the UK economic recovery has helped limit the rate of company insolvencies. Historically low interest rates, low inflation, more supportive stakeholders (including banks and government) and the availability of alternative financing have all assisted. However, the conditions that have helped contain the number of insolvencies since 2010 are now shifting. These shifts will put pressure on businesses finances and will encourage creditors who have so far been unusually tolerant to get tougher on debts. Heightened perceptions of trade credit risk were confirmed in a survey undertaken by QBE in May 201. Of the survey s 377 respondents, 22% considered that trade credit risk for their business had increased over the past 6 months. The 17% net balance (the difference between respondents citing an increase and those reporting a decrease) is a material change from the 9% net balance recorded in each of the two previous surveys six months and 12 months ago, and is approaching the high of 20% positive net balance when this survey was first undertaken in October Perceptions of trade credit risk were particularly marked in the Manufacturing & Engineering and Building & Construction sectors.
5 QBE - Managing trade credit risk in the recovering economy 4 Q: To what extent, if at all, have the trade credit risks faced by your company changed over the last six months Increased significantly Increased somewhat Business/Professional Services Building/Construction IT/Telecoms/Media Retail/Wholesale Manufacturing/Engineering 9 28 Leisure/Catering/Entertainment 16 Financial Services 3 14 ALL SECTORS Across the UK, the results were similar region by region, ranging from 21% to 28% reporting an increase, with the exception of London/within the M2 (10%), possibly a reflection of the sector demographics of London businesses. Q: To what extent, if at all, have trade credit risks faced by your company changed over the last six months Increased significantly Increased somewhat Birmingham/West Midlands Bristol Glasgow/Scotland 21 Leeds/Yorkshire London (within M2) 16 Manchester/Greater Manchester ALL REGIONS
6 QBE - Managing trade credit risk in the recovering economy Companies of all sizes are reporting a heightened perception of trade credit risk, most markedly by large companies (20+ employees) who at 27% lead the table, followed by small businesses at 21% and 19% for mid-sized businesses. Q: To what extent, if at all, have trade credit risks faced by your company changed over the last six months Increased significantly Increased somewhat Less than 0 employees employees 20+ employees ALL COMPANIES Market risk QBE s report findings revealed that businesses are also particularly concerned at heightened levels of market risk, factors which go some way to explaining the increase in concerns of trade credit risk: competitor activity and market pricing risk was cited by 42% of respondents risks relating to the volatility and trends in prices of material inputs and goods purchased were cited by 3% of respondents the lack of visibility of customer orders/revenue were cited by over a quarter (21%). Perceived change in key risks faced by companies (in last 6 months) Increased significantly Increased somewhat Competitor activity and market pricing risk 8 34 Volatility and trends in prices of material inputs and goods 4 31 Cyber crime and data security risk 4 21 Lack of availability and quality of skills and talent 7 22 Trade credit (i.e. customer insolvency) risk 17 Supply chain risk 13 Lack of visibility of customer orders/revenue Financing risk (i.e. access to capital and cost of capital Physical and people security risk
7 QBE - Managing trade credit risk in the recovering economy 6 Protecting your business Trade credit receivables typically can represent 40% of a company s assets, but for many this amounts to unsecured lending. Companies are increasingly finding value in trade credit insurance to both protect themselves from the risk of buyer insolvency and to trade with higher levels of confidence in the financial strength of their customers. Trade credit insurance provides trading confidence and peace of mind, protecting the balance sheet against credit risks such as default, insolvency and bankruptcy. It also provides a range of benefits that can help businesses manage the credit risks associated with economic recovery and a rise in interest rates. In addition, trade credit insurance can give additional insights into customers and trading partners. Not only can it provide an added layer of credit management discipline, acting as an early warning system for businesses to avoid poor quality debtors and manage existing relationships, it can help guide businesses towards those customers with a stronger financial profile. For companies worried about their exposure to trade credit risks, we urge them to speak to their insurance broker to examine whether there is more they can be doing to protect their trade receivables. Credit Insurance from QBE We provide tailored credit insurance policies to suit businesses credit risk management needs local, global, domestic or export, for those wishing to cover the entirety of their sales ledger, major accounts or specific risks. All our clients have direct access to our industry specialists who deliver market-leading decision turnaround times. As one of the largest global multi-line insurance groups, clients benefit from the security of our A+ financial rating and the risk capacity that QBE can offer. We re recognised for our exceptional customer service across policy management, risk underwriting and claims. To help our clients trade on the most effective terms possible, we also offer a Binding Contracts advice service and a Terms & Conditions review service from one of the country s leading law firms. Further information on our products and services is available from How the research was conducted The QBE research referred to in this report was completed through a programme of telephone interviews with 377 UK companies during April and May 201. The research was conducted by independent research agencies. The job titles of individual respondents contributing to the survey varied from organisation to organisation but each of our contributors confirmed that he or she was personally involved in decision-making about managing risk. The research was focused on 7 key industry sectors (defined by SIC codes) and 6 specific UK regions (defined by post code). INDUSTRY SECTORS COVERED REGIONS COVERED Business/Professional Services Birmingham/West Midlands Building/Construction Bristol IT/Telecoms/Media Glasgow/Scotland Retail/Wholesale Leeds/Yorkshire Manufacturing/Engineering London (within M2) Leisure/Catering/Entertainment Manchester/Greater Manchester Financial Services Companies targeted for interview had a minimum of employees and a maximum of 1,000 employees. Within these parameters, interviews were evenly spread across three company size categories: -49 employees; employees; 20 1,000 employees.
8 QBE European Operations Plantation Place, 30 Fenchurch Street, London EC3M 3BD tel +44 (0) QBE European Operations is a trading name of QBE Insurance (Europe) Limited and QBE Underwriting Limited, both of which are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 602GC/MANAGINGTRADECREDITRISKINTHERECOVERINGECONOMY/JULY201
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