A closer look at invoice insurance, a new fintech product that is creating security for SMEs in their time of need.
Why does trade credit disproportionately affect small businesses?
Insurers have historically been reluctant to underwrite trade credit insurance cover for small businesses, whose credit information is less available than major corporates’. This has left SMEs dependent on short-term financial props like loans and overdrafts. It also places trade credit (the provision of goods and services on payment terms of 30, 60 or 90 days) front and centre of small businesses’ cash flow management. SMEs extend around £80 billion in trade credit to their customers annually to retain competitiveness, and approximately a third of SMEs’ total assets are trade debts. In difficult times such as the present, small businesses’ reliance on trade credit as a funding source becomes even more pronounced.
How is COVID-19 affecting small businesses?
Consequently on the 4th June 2020, the Government announced that it would temporarily back a £10 billion trade credit reinsurance scheme (more details on this can be found in our recent blog on the subject). Due to this disproportionate reliance on trade credit, and the affordability challenges involved in taking out loans, the government trade credit scheme could be a lifeline for Britain’s 6 million SMEs.
“The scheme will support supply chains, enable many to prepare for restart in earnest and bring employees off the job retention scheme and back into work.”
– CBI Director of Financial Services Flora Hamilton
But while the restart on the 4th July buoyed economic prospects and spirits for some, an estimated 400,000 small businesses in the UK were unable to reopen due to the social distancing measures. Many others are struggling to adapt their operations to the new regulations, and trading conditions are riskier than ever. The Association of British Insurers has estimated that around 780,000 SMEs – three quarters of whom are based outside London – are facing unsustainable debts, taken on part of the UK’s £35 billion in Covid-19 loans. It doesn’t take an economist to recognise that these businesses desperately need help to address a debt burden that threatens at best to hinder their growth and at worst pull them under.
Exposing wider market issues
The ‘force majure’ that is Covid-19 has highlighted the longstanding plight of small businesses, which suffer not just because of a lack of credit risk transparency but due to the market’s reliance upon them as lenders of last resort. Small businesses are more risk-exposed, enjoy fewer risk-management tools, and are less able to negotiate trading terms than larger firms. The crisis has underscored all these problems, which hinder the firms responsible for half of the UK’s GDP.
Perhaps in part because they’ve always sailed closer to the wind risk-wise, small businesses are famously resourceful, and their flexibility in terms of both operational structure and products is certainly advantageous in a crisis. But learning from the 2008 recession, small business owners’ low awareness of the financing solutions available, and inability to access alternative forms of finance can hinder their recovery.
How can invoice insurance help SMEs through the crisis?
One alternative form of financial support is invoice insurance, a new insurance product that has only been around since 2017, when (please excuse plug) Nimbla first brought it to market. The ability to insure individual invoices affordably is changing the stakes for small businesses dramatically, by helping them to manage their cash flow and making it possible for them to grow securely, despite uncertain trading conditions.
Obviously, invoice insurance is especially helpful for SMEs trading through the current crisis, especially since new temporary legislation is allowing businesses to trade whilst technically insolvent, making credit risk nigh impossible to assess (more on this in an upcoming blog). Trade credit insurance protects around 630,000 businesses in the UK every year against customer non-payment, and can be essential to secure the finance that’s needed for those businesses to grow. But to take advantage of this aid in the crisis, SMEs need to seize new financial solutions.