Liquidity dangers

According to research by information services provider Experian, 27% of debt payment in December 2009 was overdue and businesses making late payments were remitting at an average of 20.88 days after agreed terms; the insurance sector was marginally better at 20.6 days.

Further reports in February by the Federation of Small Businesses and the Institute of Directors have also shown that broker managers and their clients remain under severe cash flow pressure despite recent signs of economic recovery.

The FSB surveyed nearly 10,000 members and discovered that the private sector has the worst record for paying bills late. Central government was the next worst offender, despite its Prompt Payment Code and, in 2008, promising to pay within 10 days.

When a customer pays a bill late, in effect, the business owed is providing a loan. According to the survey, 43% of businesses had used a bank overdraft as a source of finance in the previous year, 41% had dipped into their own savings and 4% took out a second mortgage. Concern over cash flow (42%) was beaten only by the recession (72%) as the main obstacle to the success of a business.

John Wright, national chairman at the Federation of Small Businesses, said: "Late payment has been a particular problem in the past year. It is more important than ever that this worrying practice is brought to an end."

Data from the IoD backed up the challenges that this poses for brokers running their own businesses and advising clients. A survey of more than 1,000 directors found that, since 2001, the number of IoD members financing their businesses through bank loans and overdrafts has fallen from 85% to 64%.

Much of the slack has been taken up by the use of credit cards, with 20% using them to finance their businesses.

Credit warning

While credit cards can provide access to quick finance, Miles Templeman, director general at the IoD, pointed out: "Any contraction in credit card finance could see significant price hikes, adding to the already grave difficulties that many businesses are having in accessing funds." Research from Moneyfacts highlights that interest rates on credit cards are now at a 12-year high.

Trade credit insurers are ideally positioned to forecast future economic conditions: they know when firms stop paying their bills, which can occur well before they actually go out of business and adversely impact a supplier's cash flow.

According to Andrew Share, credit management services director at Coface, the situation remains challenging: "The number coming to us for collection was increasing in the fourth quarter of 2009. Cash flow for small and medium-sized enterprises is going to suffer even more in 2010 because they are coming into a challenging area for them. It would be naïve to say that things will improve dramatically; the economy may grow but it will be tough."

Call for restraint

Share also pointed out that companies that survive the recession need to take care with their cash flows, not overextending themselves as growth returns. Brokers may also find that clients have deteriorating credit ratings because the information that credit ratings agencies use will be based on recessionary statistics.

He concluded: "Some can't publically show that they have rebuilt their balance sheets. Communication flows are key to get an accurate view of a company."

One way in which brokers have avoided the pitfalls of client cash flow problems has been third-party funding. Howard Lickens, chief executive officer at New Malden-based Clear Insurance Management, said that his business has seen stable uptake of such funding during the recession and that it is beneficial for client cash flows as well as brokers'.

He also pointed out that it should remove the risk of errors and oversights in payment flows for clients with multiple insurers: "All too often, an insurer forgets to set payments up correctly and clients can find themselves with catch-up payments that can really hurt. It is by no means an unusual experience." With challenges ahead, it could well prove to be a key area for brokers this year.