Every year thousands of otherwise successful, well-run businesses disappear because of bad debt – and the timber industry is among the most vulnerable. The most common scenario is for a customer to go bust, leaving unpaid bills. Another big problem – despite recent legislation to protect small businesses – can be late payment that squeezes cash flow.
The construction sector, a major purchaser of timber, is notoriously volatile, with just one major business failure capable of dragging down several supplier firms. Recent figures from Dun & Bradstreet confirm that insolvencies – and so bad debt – are on the increase. The number of business failures in the second quarter of 2001 rose 15% on the previous quarter and by 13% on a year-on-year basis.
One reason why the timber trade has a larger failure rate than many other sectors is the requirement to commit relatively large sums of money to stock purchases – a trait that is exacerbated at certain times of year by the seasonal nature of much of the demand. The system works most of the time, thanks to helpful bank managers and customers who are able and willing to pay at least reasonably promptly.
Unfortunately things do go wrong occasionally and, when that happens, the consequences for their suppliers can be far-reaching. This is especially true of small and medium-sized businesses, which are generally less able to withstand bad debt – and bad debt in the timber trade is well over twice as high as in the economy overall.
With some economists forecasting a downturn or even a recession, it is a situation that anyone might encounter. All the more so, because many of the sectors that use large amounts of timber, notably construction and manufacturing, are also among the more prone to downward economic cycles.
In these circumstances, it is common sense to protect your firm against bad debt, and one way of doing so is to buy credit insurance. Every year UK firms spend an estimated £320m in premiums for this type of cover. Apart from protecting enterprises against slow or non-payment, it can improve their credit rating and make it easier to obtain finance. The sad irony, however, is that the very businesses with most to gain from credit insurance have tended to stay clear of it.
Credit insurance has traditionally been purchased by larger companies. Their smaller rivals have regarded it, often rightly, as too complex, time-consuming and expensive. Yet small firms are the ones that need this protection the most, with just one bad debt experience capable of causing redundancies or even closure.
Fortunately, a new emerging type of credit insurer has made the whole process much simpler and more affordable. Small- or medium-sized businesses can be more selective, covering themselves on an invoice-by-invoice or single buyer basis. In other words, they have to buy protection only when they really feel they need it.
This is, of course, less comprehensive, but it is also much cheaper, with premiums starting at around £100. The key enabler here is the Internet. It has been possible to buy credit insurance on-line in the UK since June 2000 – a process that can take as little as five minutes.
So, what should firms do if they are interested? One option is to go to a broker, though in practice there is a wide variation among intermediaries in their understanding of this subject.
