Credit insurers: “Keep payment terms as short as possible”

Although once again delayed, Brexit is casting its shadow, particularly in the financial field. Credit insurers, who cover payment problems, have noticed that the uncertainty in the UK is leading to a decline of consumer confidence and they predict problems when and if there’s a hard Brexit. But not everyone’s pessimistic about Brexit.

Edwin Kuhlman, Head Acceptation Atradius and Edwin Busio, Director Coface

Credit insurers can easily notice the impact of the persistent uncertainty regarding Brexit in their figures. A doubling of damage figures can already be seen with debtors in the UK. This is caused by the higher uncertainty and decreased consumer confidence, which is leading to more bankruptcies. “That can, naturally immediately be seen in the damage figures,” says Edwin Kuhlman, Head of Acceptance for credit insurer Atradius. But the damages on British debtors are also increasing from the Netherlands, as well as the number of requests for credit insurances. “The number of requests on British debtors has increased by 15 per cent in the past 12 months.” A considerable increase was registered particularly in the months of January and February of this year, when the Brexit deadline was still set for 29 March. “Companies really started to worry when no solution was found yet.” But Atradius has also noticed a considerable increase in the number of potential policyholders locally in the UK.

More restraint
“The eventual impact of Brexit on the prices of credit insurances won’t be very large,” Edwin expects. Credit insurance generally applies to the entire turnover of an entrepreneur, and the export to the UK is part of that entire turnover. Besides, upon determining a rate, multiple aspects are taken into consideration, such as the country of destination, the sector or the payment terms. Because of the many variables, the increased risk in the UK is spread, and the influence on prices – according to Edwin this influence is already quite low – is relatively small. However, Atradius assesses the transactions of exporters with entrepreneurs in the UK more critically. “We’re showing a bit more restraint in our acceptance policy. Certain sectors have a lower acceptance degree, though.” That is mostly the case in construction and retail. The degree of acceptance in the fresh produce trade, an important market for Dutch exporters, hasn’t decreased.

For now, Edwin assumes that the UK leaving the EU will be taken care of adequately, and he expects a soft Brexit. From the price trend of the British pound, he concludes that the currency market has similar expectations. Immediately after the Brexit referendum in 2016, the rate of the pound dropped significantly compared to the euro, but in recent months, the rate remained fairly stable. This is an indication that the currency market assumes Brexit will be soft. “If it’ll be a different scenario, we expect the rate of the British pound to continue to worsen.”

Payment terms
To deal with the Brexit perils, Edwin advises exporters to map who they’re doing business within the UK as thoroughly as possible. “Make sure you know who you’re doing business with,” Edwin warns. And keep payment terms as short as possible. “That’s particularly important in the fresh produce sector, because payment terms are related to the products.” And, naturally, credit insurance is one of the options that exporters can use to cover their risks and continue to grow in a difficult market.

Not everyone is pessimistic
“The good news is that Brexit was delayed by another six months, giving companies the chance to prepare,” says Edwin Busio, general manager of Coface Netherlands. “On the other hand, the prolonged uncertainty might be even more damaging.” The consequences exporters will experience depend on how Brexit will eventually play out. “A hard Brexit will definitely result in a worse scenario than a better-managed version. If there’s a hard Brexit, we’ll keep in mind a stronger decline of the economic growth in the UK and a significant increase in the number of insolvencies.” However, Edwin expects consequences might not be that bad for fresh produce, particularly in the medium term. “The UK isn’t self-supporting, so food will always have to be imported. When there’s a crisis, you often see that basic needs still have to be met. People tend to save on luxuries first.” Edwin, therefore, expects a shift towards cheaper varieties of fruit and vegetables rather than an immediate and considerable decrease in volume.

The development of the pound’s rate depends on the type of Brexit. “If it’s a hard Brexit, we’ll see a bigger impact on the rates, resulting in the import of goods becoming more expensive.” However, from customer contacts, Coface gathers that not all entrepreneurs have just negative expectations for Brexit. “Some see opportunities as well. Experience teaches us that Dutch entrepreneurs are generally a bit more creative and better prepared to deal with changes as big as this compared to entrepreneurs in other European countries.”

According to Edwin, the British market might be important to Dutch exporters, but few entrepreneurs are dependent on the UK for more than ten or 20 per cent of their turnover. This fact, combined with the possible opportunities, might explain why there’s only a limited additional demand for credit insurances specifically for debtors in the UK. From that perspective, people might be underestimating what is about to happen. Besides, Edwin mentions it’s important when supplying commercial credit to entrepreneurs to think about the accompanying risks, particularly when times are good. “Solutions in the field of insurance coverage are after all less widely available if the house is already on fire, so to speak.” It’s expected Brexit will definitely have an impact on both prices and the amount of credit insurance coverage for debtors in the UK. “Right now, we’re still very capable of supporting our current customers and their activities in the UK, and to support them regarding the increased risks. Our existing customers are our priority. It will become more and more difficult to meet new demand, and premiums are likely to increase more and more as well.” Edwin mentions that in addition to the UK, however, other countries are also giving cause to increase alertness, such as Italy and Turkey, not to mention the impact of a possibly escalating trade conflict between the US and China.

More comprehensive
Edwin says that particularly for the fresh produce sector – with its relatively limited margins, debtors often account for a considerable part of the balance, and each debtor loss has its impact – it’s important to always consider these risks. A credit insurance is one of the possible solutions. This doesn’t just involve insuring the risks, but also utilising the available information and expertise to estimate which buyers and which market regions pose a risk for you as entrepreneur, and to counterbalance that to the time and effort you invest in it. It’s also important to make sure the trade agreements and delivery conditions are correct concerning content and that they’re used in the right manner. That’s important in addition to ensuring internal collection procedures and having a partner who can help when invoices remain unpaid too long. Regarding Brexit, changes and risks are naturally more comprehensive than just the increased debtor’s risks. Fortunately, most entrepreneurs have mostly been informed about the impact of, for instance, customs formalities, corporation tax, VAT procedures and aspects pertaining to industrial law. “Within our own field, we’ll probably be faced with losing the option to use the European order for payment in the UK; this is a means that made it relatively easy for exporters to start a collection procedure in the UK at a limited cost.”

Edwin expects that the elections for the European Parliament, which the UK will have participated in because Brexit was delayed, will give an indication about how the population now feels about the EU. “Turnout and results will help PM May’s government to set the course towards Brexit later this year.”

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