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Protection against uncertainty

What a year it has been in the world of politics. The recent triumph of Donald Trump in the US was an extra surprise to the global economy after the UK’s decision to leave the European Union. Christian Vollbehr, Head of Trade Credit, North Europe at AIG Europe Limited will be presenting the financial implications of the latter at the 10th Annual Export Finance Germany Conference. Here is a taster of his thoughts on Brexit.

The decision by the UK electorate to leave the European Union earlier this year has raised a myriad of questions about the outlook for the business environment but one thing looks certain: existing trading patterns are likely to see disruption. Although the knock-on effect of the UK leaving the EU is still impossible to quantify for businesses with any degree of meaningful accuracy, it is likely that small and medium-sized businesses – those that do not have the scale to shift their trading patterns or adapt to new market conditions easily – will be among those hardest hit. The likely consequences will include the need to find new sources of business or to step up trade in less familiar markets.

A critical uncertainty is around the risk of non-payment. As any credit manager knows, their company’s lifeblood is cash, and bad debt can have a catastrophic effect on liquidity. Dealing with new business partners in unfamiliar environments inevitably increases the risk of payment problems.

The other issue is working capital. If UK companies shift more of their exports to new markets, this would typically require them to offer longer payment terms to account for shipping time and also the greater reliance on supplier credit in many developing markets, in the absence of mature working capital solutions.

The answer could lie in trade credit insurance (TCI), which offers companies a degree of certainty over their on-going cash-flow.  TCI provides protection for companies that sell goods or services on credit terms and are exposed to the risk of non-payment due to their domestic and/or export customer’s insolvency, protracted default or political risks that may prevent the buyers from fulfilling their payment obligations.

Managers responsible for buying insurance know about property and casualty risks but often don’t know about the moveable feast that is trading risk, or that TCI is not just a commodity but a highly effective management tool to help companies avoid taking on other companies’ risks, and thus minimise bad debt. In the fallout from the 2008 banking crisis, trade credit products were accused of being ‘fair weather friends’ with a number of providers arbitrarily pulling cover. But the market has moved on significantly since then. Innovation has been led by greater proliferation of excess of loss, non-cancellable cover, which stops credit insurers from reining back or withdrawing their credit limits.

We offer market-leading solutions that help businesses of all sizes take control of their accounts receivables book and trade with the certainty that failure by a large customer won’t mean disaster for them. Technology plays a vital part of that, giving client management deeper insights into their balances and exposures. Our Trade+, the first market offering to offer ground-up cover with non-cancellable limits, gives clients a digital display of their creditors and how regularly and promptly they pay so they’re able to see if anyone is looking vulnerable.

TCI helps give companies confidence to push for growth, especially in developing markets where there is often more uncertainty and less security. In addition, it helps them get the capital they need to expand; having a policy in place makes it more likely that banks and financing companies will offer funding.

Christian will be speaking at the 10th Annual Export Finance Germany Conference taking place in Berlin on the 1st and 2nd of December.
This content is provided by Euromoney Seminars for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.