Where a business has seen a reduction in its credit insurance since 1 October 2008, the scheme will now offer six months top-up cover at a price of 1%. The lower limit of £20,000 has been removed and the upper limit of £1m has been increased to £2m.
The scheme, which runs until 31 December 2009, represents a short-term intervention that allows suppliers to purchase Government-backed insurance to either restore cover to the original level or double the amount they are able to obtain from the private sector (up to the value of £2m).
Trade credit insurance contracts provide suppliers insurance against the risk of a buyer defaulting on payment for goods after a period of credit. It gives suppliers confidence to extend 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 even used to support provision of 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 such as loans, invoice discounting and factoring services).
In 2008, credit insurance firms insured over £300bn of turnover, covering over 14,000 UK clients in transactions with over 250,000 UK businesses.