Insolvency statistics highlight the challenges in managing trade credit risk at a time of uncertainty

The latest Insolvency Service figures released on 30 October 2020 show reductions in corporate insolvencies but mask the true state of the country’s business sector. The Q3 insolvency statistics show that there were 2,672 company insolvencies in Q3 2020, down by 9% on Q2 2020 and down by 39% on Q3 2019.

Certainly it has been a subdued quarter, with continuing Government support for companies – with the uncertainty around the furlough scheme extended or replaced – and restrictions on court action. However no-one believes these to be more than short-term delays, holding back a wave of insolvencies.

The trade credit insurers have been encouraged to support business through the £10bn Government backed UK Trade Credit Reinsurance Scheme.

The reality of how bad things could be is uncertain. It was Churchill who said, “I only believe in statistics that I doctored myself”. Here at The Channel Partnership, we would love to say we believe the national statistics, but no amount of doctoring will make them any more believable.

CreditSafe explained in its most recent ‘UK Business Insolvencies’ report that “distressed businesses are managing to keep afloat by making use of the high level of Government support available”.

There has always been concern when assessing credit risk that company accounts are always historical. The current extension to filing dates, and the fact that accounts for companies with a year end up to 31st March 2020 will cover a period that precedes any impact of Covid-19 and the lockdown of the economy, makes those historic accounts almost irrelevant to current risk.

Companies with credit insurance rely on insurers to make reasoned decisions and also to keep abreast of current payment performance as well as recent management information wherever possible.

For those companies managing their own trade credit risk, the challenges are greater and it may be that credit control teams need more budget and more resources to try to make informed decisions.