Firms should look to spread their risks

When a company the size of Carillion fails, as we heard in the news earlier this year, it sends shock waves throughout the business community.

In this particular instance the real tragedy unravelled with the many sub-contractors who were taken by surprise and lost significant sums of money.

There are usually signals which indicate things are not as they seem, such as increasing debt burden or wholesale changes to the business model.

However, Carillion went from a stable operating position, being awarded multiple government contracts, to a rapid deterioration and insolvency within about 18 months. So how can this be? Behind the scenes, credit insurers were staying on risk due to the information they were receiving around refinancing and potential new deals.

The result was multi-million-pound claims being submitted and upheld to support the clients’ cash flow.

Perhaps lulling many into a false sense of security, even when profit warnings were being issued, government contracts continued to be awarded, giving the impression that the business was too big to fail.

Unfortunately, the impact of this failure for the sub-contractors was a stark reality.

The scenario of not dealing directly with your customer, in most instances they were a second or third tier supplier, created a domino effect that was costly and inevitable.

Credit cover for a business is not always a priority, probably because we believe it will never happen to us.

Carillion is a painful example of what can take place, alas to those who can least absorb such a largescale failure.

Another aspect to consider is market intelligence.

This type of insurance cover is only possible because the insurers have access to information on what is happening in a particular market sector.

An early warning system that enables them to advise businesses on where they might be exposed.

This means that a more prudent approach would be to spread the risk and work with lots of different customers, preferably directly.

This would change the credit risk profiling and give more flexibility to absorb any warnings by providing more options, enabling a switch of focus within the business.

If you have any concerns or wonder how credit insurance might protect your business then please speak with your usual insurance advisor for further details.