What would happen to your business if one of your top 10 clients became insolvent? Surprise changes in cashflow are one of the prime causes of print business failures and at the height of the recession, when the high street was awash with retail insolvencies, it was a common theme running through the administrators’ reports of many an SME printer.

Today, we stand on the brink of another global recession – the sovereign debt crisis in the eurozone, allied to falling factory output in China and downgrades to growth forecasts across the developed world all point to looming catastrophe. Politicians and central banks are desperately trying to avert disaster, but there is no way of knowing if they will succeed. As such, the prudent course of action for business owners would be to prepare for the worst – particularly given the mounting concern over the retail sector, which is a major customer for the print industry – but hope for the best.

This is where credit insurance comes in, but – and here’s the interesting part – if you think insurance is solely a means of protecting yourself from risk you’d be wrong. There’s an added benefit: credit insurance could turn out to be a route for printers to improve their access to finance – particularly invoice discounting, which is one of the most common sources of finance to the print industry. In fact, according to industry experts, the degree to which credit insurance could improve borrowing terms is such that it could literally pay for itself. And, of course, there is the prime benefit to consider in terms of protecting your business from the nightmare scenario of a client going bust with up to 90 debtor days on the clock.

Given that the latest credit report from the Bank of England paints a picture of tightening domestic credit and more stringent loan covenants and collateral requirements for sub-million-pound turnover companies (comprising the bulk of the print industry), added to which credit analysts are now predicting that we are already experiencing the start of a global credit crunch (terrifying when you consider the 2008 credit crunch was solely a Western phenomenon), anything that can improve a firm’s ability to borrow will likely prove crucial to surviving the next 12 months.

Domino effect
In 2009, as the recession really started to take its toll, credit insurance limits were suddenly slashed across the sector. Relatively few printers use credit insurance; however, almost all consumables suppliers do and when these suppliers suddenly found they were no longer able to insure themselves against mounting losses from print company closures, they were left with little choice but to impose tighter credit controls of their own, demanding cash on delivery or even upfront payment in some instances. This proved disastrous for cash-strapped printers, many of whom went under as a result of the squeeze on their cashflow.

This situation was the result of massive losses incurred by the insurance sector during the same period – with some of the sector’s big players registering loss ratios in excess of 100% – and while changes to insurance policies, such as the introduction of  30-day notice periods on cancellations and reductions as well as non-cancelable credit limits, mean that this could not happen again, it will have soured the relationship between underwriters and their one-time clients in the print sector. However, there is now good reason for printers to revisit this relationship because it could end up giving them valuable cover at effectively zero cost.

Although a new concept to the print sector, Robert Michael, of Miller Insurance Services, explains that businesses in a raft of other industries use credit insurance to reduce the cost of their borrowings. One company in particular found that the saving on its finance costs was double the cost of its credit insurance. Michael believes that printers should look at credit insuring their sales ledgers both as a means of protecting themselves and improving the deal they get on their accounts receivable finance. "The bank can take a ‘lost payee’ position on the policy, which means that in the event of a loss that gives rise to a claim, the claims payment will be made to the bank," he says. "That gives the finance provider more security, so with that greater security they can feel more comfortable to lend at a lower cost or increase the advance rate to the customer. So it’s using the cover as security for the financier."

Michael advises discussing the proposal with your bank first to establish what they can do in terms of improving the cost and availability of finance given the added security of credit insurance. "Invoice discounting facilities generally come up for renewal once a year, so in the lead up to that renewal exercise printers should ask their financiers whether they will reduce the cost of borrowing or increase the advance rate if the printer credit insures their sales ledger," he says. "If the answer is that it’s something they would consider then you would need to work with an insurance broker to structure the most appropriate deal that works for the client and the financier. So it’s a case of bringing the bank, the broker and the credit insurer all together to structure a deal that brings about that soft landing for the client."

Last resort?
One thing to be aware of is that some insurance underwriters take a dim view of invoice discounting, which is still perceived by some as a ‘lender of last resort’. According to Gerry Hoare, founder of Deal Bureau, invoice discounting is actually a better form of borrowing for many businesses than an overdraft. "Although an invoice discounting line is still a liability on the balance sheet – the same as a loan or overdraft – it reduces your gearing because you’re only borrowing against your accounts receivable and therefore the company appears stronger," he says. "It is also aimed at companies that are stable or growing. If your sales ledger is reducing then an overdraft or loan will be the only option, because an invoice discount lender wouldn’t take on a client if the business is distressed." While this misconception is not the fault of print businesses, it is in their best interests to work with their insurance broker to educate the underwriters who will price their risk, because the availability or lack of credit insurance cover can have a significant impact on printer supply chains – as was the case in 2009. "Printers can take an active role by being open about their business – business owners have a responsibility to have a dialogue with credit insurance underwriters to position their credit risk," explains Michael. "Submitting up-to-date poorer financials is better than out-of-date good ones."

There are a variety of insurance products available (see boxout) and there needs to be a conversation between the printer, the insurance broker, the financier and the insurer to decide on the best option and to structure a deal that works for all parties.

While the banks continue to restrict the flow of credit to small businesses, the availability of credit insurance is not currently a problem. Following a reduction in capacity in the market in 2009, as a reaction to events in the tail end of 2008, a combination of new market entrants and underwriters trying to win new business has resulted in capacity returning to 80%-90% of pre-recession levels, while premiums are judged anecdotally to have fallen by up to 30% in this year alone.
"At the moment there is still competition in the marketplace, but I suspect underwriters are being measured in terms of the risks they’re prepared to take on," explains Michael. "If they see a piece of business they like within a sector they like, they’ll probably put a very competitive price in, but you may find there are opportunities in sectors which they don’t like and, as a consequence, they may take a different attitude towards that risk. The key to getting the best deal is to provide good quality information."

NEED TO KNOW: CREDIT INSURANCE
Cover options
"There are essentially three different products out there," says Miller Insurance’s Robert Michael. "There’s what’s called whole turnover cover; excess of loss or catastrophe cover; and key customer cover."
• Whole turnover This is where you insure the whole sales ledger or, in other words, the whole turnover of the business
• Excess of loss/catastrophe This is primarily aimed at larger companies with sophisticated credit management. The company will take on the first level of loss annually and the insurance kicks in above that self-insure element. In practice, a business might absorb the first £5m worth of losses, with the insurance cover applying to everything over that
• Key customer This is where the company covers their top 10 or 20 exposures, which in a normal business would typically equate to around 80% of the sales ledger

Rates
Rates are usually expressed as a percentage of turnover and are dependent on the size of the sales ledger, the sector, the spread of risk and historical loss rates, and analysis of the sectors that the customer is selling into moving forward. The smaller the turnover, the higher the rate and vice versa.

According to Michael, whole turnover cover will likely be the most expensive, followed by the key customer cover in the middle and then the excess of loss insurance, which comes in as the cheapest because the printer is taking on more risk itself. "However, recently there has been a convergence in the pricing across all three because competition among underwriters is so fierce," adds Michael. "You’ve got to look at the cost benefit – not just the price but what level of cover are you getting as well, rather than just opting for the lowest premium. You also need to consider the reduction in borrowing cost that the bank is willing to offer you and how that may differ depending on your level of cover."