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Government announces trade credit insurance cover for business

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Issued 22 APRIL 2009

Business Secretary Lord Mandelson today launched a scheme providing up to 5bn of additional trade credit insurance to businesses who have suffered reductions in their level of cover. This will be delivered as part of the Working Capital Scheme and will help mitigate the cash flow constraints caused by the withdrawal of trade credit insurance cover and constraints on the provision of working capital that this withdrawal has created.

From May 1 until December 31 this year, UK businesses will be able to purchase six months' 'top-up' insurance from the Government if credit limits on their UK customers are reduced. The qualifying window will be backdated to include any reductions since April 1.

The scheme comes in response to growing concern from businesses across all sectors of the economy that reductions in the value of insurance cover create pressure on suppliers to shorten payment terms, and can place additional pressure on businesses' working capital facilities.

Business Secretary Lord Mandelson said:

"This scheme will provide a much needed breathing space for businesses suffering as a result of the reduction in trade credit insurance.

"We will not prop up bad businesses or take unacceptably high risks, but will provide targeted support to address specific challenges that businesses are facing and help maintain supply chains".

"This scheme is a transitional measure which will give viable businesses facing short term problems a chance to adjust to changing circumstances."

Companies from all sectors and from all stages of the UK supply chain will benefit from the increased certainty that this scheme gives, providing real and targeted assistance for British businesses.

Under the scheme, suppliers can purchase Government-backed insurance to either restore cover to the original level, double the amount they are able to obtain from the private sector, or 1 million, whichever is the lower. This design protects the interests of the tax payer as Government will never take on more risk than the private sector.

Government has worked collaboratively with the private sector insurers who will provide this product to their clients on Government's behalf.

The first 1bn tranche of guarantees under the 10bn Working Capital Scheme has now been completed with the banks. A maximum of 5bn of top-up cover for trade credit insurance will also be provided as part of the Working Capital Scheme and the Government will also consult on guaranteeing letters of credit.

Notes:

1. Trade credit insurance contracts provide suppliers insurance against the risk of a buyer defaulting on their payment for goods after a period of credit. The product helps give suppliers confidence to extend sometimes lengthy payment terms to their buyers and banks the security to provide working capital facilities. By offering suppliers protection against financial loss, trade credit insurance is sometimes used to support provision of financing products such as loans, invoice discounting and factoring services. Reduction or withdrawal of credit insurance can therefore lead to financial pressure on both buyers (as suppliers may wish to shorten payment terms) and on suppliers (due to its interaction with other financial products).

2. The three largest credit insurers (Euler Hermes, Atradius and Coface) have agreed to offer the scheme to their eligible clients. Scheme membership has also been opened up to other credit insurance providers with whom Government is currently in discussions. Eligible businesses should apply for the scheme through their credit insurance provider.

3. In 2008 credit insurance firms insured over 300bn of turnover, covering over 14,000 UK clients in transactions with over 250,000 UK businesses.

4. The scheme will come in to effect following appropriate Parliamentary approval, expected to be received by May 1, 2009.

5. Reductions in the value of insurance which have occurred since April 1, 2009 will be eligible for the scheme, meaning some businesses will be able to benefit from the scheme immediately it comes into effect.

6. Further details of the scheme can be found on the BusinessLink website at the following URL http://www.businesslink.co.uk/creditinsurance

7. On Tuesday April 21, the Association of British Insurers released a Statement of Principles outlining the standards of service customers can expect from their insurance provider. All insurers offering the Government top-up scheme are required to have signed up to the Statement. The Statement can be found at the following URL http://www.abi.org.uk/Newsreleases/viewNewsRelease.asp?nrid=17616

8. The Export Credits Guarantee Department will shortly consult on a possible measure to share risk with banks that confirm letters of credit for UK exporters.


About the Author

Crown Copyright. Material taken from the BERR- Department for Business, Enterprise and Regulatory Reform replacing DTI - Department for Trade and Industry. Reproduced under the terms and conditions of the Click-Use Licence.


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Article Published/Sorted/Amended on Scopulus 2009-04-23 12:13:26 in Business Articles

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