Credit where credit’s due

In the last weeks of 2009, the Government announced that its trade credit insurance top-up scheme would expire at the end of December. You’d be forgiven for having missed it – outside of the financial news wires it wasn’t widely reported. But what might seem to some like a small, trivial piece of Government legislation actually goes to the very heart of one of the biggest problems facing PC retailers and resellers in the UK today.

The reduction of trade credit insurance for the retail sector is the silent killer, and is arguably much more dangerous than the more overt threats presented by supermarket incursions into the PC space, and e-tailer price slashing on hardware. It may not be physically tangible, but credit affects the ability to purchase, and the ability to trade, and is very much the lifeblood of retailers. When insurers reduce or pull credit, it’s not just the financial equivalent of pulling the rug out from under your feet, it’s like blowing up your foundations with Semtex.

The problem affects all businesses, but the large scale cash fluctuations inherent in a retail operation make that sector particularly exposed – and with smaller IT retailers, where margins have been notoriously tight for years, the pressure weighs particularly heavily.

Retailers in the IT trade have become increasingly reliant on trade credit over the years in order to stock up and trade with fluidity. This reliance means that any significant reduction can have devastating effects on trading ability – as it most notably did for Woolworths and Zavvi in 2008, both of which subsequently went bust.

Early in 2009, the issue of credit reduction hit the biggest PC retailer of them all – PC World. The firm insisted it was normal practice in such economic times, but the move sparked wide-reaching fears at the time.

The problem wasn’t peculiar to the UK. As other European countries, such as France and Sweden, began setting up government-funded support initiatives to compensate for the reduced or pulled credit, the British Government followed suit with its own ‘top-up scheme’. Essentially, it was designed to provide supplementary credit to small businesses that had their exposure reduced. In theory, this should have been a great thing for PC shops – however, in practice many saw it as unworkable.

“One major problem with the UK top-up scheme was that most of the credit limit insurers were pulling credit to zero,” says Andrew Child, head of global trade credit for the UK at insurance broker Aon. “The top-up scheme didn’t work because they didn’t have any cover in the first place, so you’re not topping anything up. Now, what the French did, as well as various other countries, was to provide an element of cover even if the cover was zero. That was a fundamental difference of the UK scheme versus France. But not only that, the UK was also charging a premium rate of two per cent to start with. This was expensive – very expensive compared to other schemes. You’ve got to bear in mind people’s margins; some businesses were able to make quite a thick margin on it, but most people didn’t participate because they just couldn’t afford it. Very simply put, it was a political sham. Other European countries had stepped in to help out, and the UK Government wanted to be seen to be doing something. When you look at the detail, as in the practice, of course it wasn’t really helping anything.”

John Waltham, finance director of Radcliffe Interactive, owners of buying group Brigantia adds: “The major credit insurers all participated with reluctance, and at least one CIFS who do considerable business in our sector decided not to get involved, I am told.”

In response to the sustained criticism, a spokesperson from the Department for Business, Innovation and Skills told us: “This is a temporary scheme the Department put in place to provide targeted, transitional support to firms whose cover had been reduced and who needed support while they adjusted to new conditions. To date, 104 policies have been accepted for 72 suppliers and cover to the value of £18m has been issued. Many businesses have found other ways to adapt and thus have not needed to take up the Government offer.”

The Government has also claimed that businesses were already reducing their dependence on trade credit insurance, but this is largely refuted by insurance firms. Opposition politicians weren’t supportive of the scheme either. Mark Prisk MP, shadow business minister, says: “Businesses have repeatedly criticised this scheme, and others, for being overly complex and bureaucratic. During the deepest recession in peacetime history, it would have been much better to have provided a single national loan guarantee scheme: simple, easy to access and open to all viable businesses in all sectors.”

Now that there is no state support system of that kind, the issue of reduced or pulled credit can be seen as more pressing. Some economists say we are seeing green shoots, but most agree that the residual effects of this recession will be felt for years. The question of whether we are going to see more retailers close down as a result remains, and it threatens businesses of all sizes.

John Hutchinson, credit analyst at distributor EntaTech, says: “If suppliers follow insurance cover slavishly, then yes, we will lose a number of retailers, small and possibly large. PC World in particular has gone through a painful time this year. However, having shed unwanted parts of the group and restructured the remainder along with a revamp of its retail sites, the company appears to have weathered the storm – at least for the time being. Nevertheless, the future for retail businesses remains difficult as they compete with online competitors free from the burden of stocking and property overheads.”

Of course retail is still suffering from reduced consumer footfall, but it’s logical to assume that will be alleviated as the economy picks up. However, far from solving the problem, this rise in demand can actually cause a whole new set of problems.

“Reduced credit is still a major inhibitor of business. The problem will come when sales pick up, because smaller retailers with reduced credit lines will be unable to service the upturn,” Keith Warburton, president of trade body the TCA, told us.

It should be noted there are other options for topping up credit offered by companies in the financial sector, such as Aon. There are also avenues inside the PC trade being put in place – buying group Brigantia and its parent company is set to launch its own support operation this year, which it is calling a central purchasing hub scheme.

The issue of reduced or removed credit is still a major, if not widely reported, problem to those in the business of selling PCs and technology. And it looks as though it will remain, even if significant economic recovery kicks in. It still has the potential to wipe out retailers across the board, big or small, and while things may be in a better economic state generally to what they were this time last year, it could be a defining problem throughout 2010.