Featured article: April 2020

Shutdown – a UK Business Perspective by Ian Selby – Commercial Director, Nexus Trade Credit UK

5th May

It is now seven weeks since the lockdown came into effect in the UK. During this time, we have seen a sharp downturn in activity across the globe with certain sectors particularly hard-hit. The response from policymakers and central banks has been robust with interest rates lower and QE levels even higher than in 2008 – our ‘once in a generation’ event. With output data for April at the lower end of even the most pessimistic of predictions, this intervention has clearly not been enough to stop the fallout from a simultaneous stalling of global supply and demand. As time goes on, we are getting a better grasp of the new economic landscape in the UK.

Firstly, government support for businesses through the employee furloughing scheme has staved off the worst of a collapse in the jobs market. That c.25% of the workforce – some 6.3 million people – have formally enrolled suggests the depth of pressure that would have been felt if businesses had been left to shoulder the burden alone. Although the costs are already running at £8 billion to the 3rd May, the implications of unemployment at even half this level makes this money well spent. As important, is that the cash from the scheme is flowing through to employers quickly. This, coupled with a well-run tax holiday scheme, is undoubtedly propping up many UK businesses and households

Less successful has been the provision of secured lending through the Coronavirus Business Interruption Loan Scheme (CBILS). Tight criteria and slow turnaround from the banks has seen just £4.1 billion approved to the end of April. Some 50% of all applications are still to be processed. The Bounce Back Loan Scheme – aimed at small business loans up to £50,000 – launched on the 4th May - saw 45,000 applications in the first day, suggesting there is strong pent-up demand for finance.

This leads us on to the supply chain and the role of the credit insurance market. From speaking to our insureds there is a continuing willingness from all parties to work within the supply chain and ensure payments are made within sensible parameters. As we see it, however, the biggest risk is when we come out of the lockdown. As trading starts to return to ‘normal’ levels businesses will need to re-stock or build up sales before cash starts coming in. This requires the support of creditors. If those creditors are still owed cash from months back, it is going to be a big ask for them to extend support at this critical juncture.

At the time of writing a government-backed scheme for the credit insurance market in the UK is being widely discussed, similar to schemes already launched in some European countries. By the time of publication, we are hoping a firm agreement has been put in place. Namely, that the state will back the debts of businesses that need to extend payment terms and credit limits beyond the scope of a normal credit insurance policy. Any such scheme needs to learn the lessons of 2008, making sure the correct incentives are in place and that the process is streamlined. People understand we are in ‘unprecedented times’ and want to support trade and the wider economy. Government support for the credit insurance market has a vital role in ensuring this for the long term public good.

The other significant risk factor is more long term. We don’t yet know the effect that ongoing restrictions or changes to individual behaviour will have on the world. At the very least we can expect an element of drag on the economy, but there will be sectors where demand patterns may have changed forever. It is hard to picture being out for a company Christmas party this year, even more so getting a short haul flight for a weekend in Spain. When selling all of Berkshire Hathaway’s shares in the major airlines at the start of the month, Warren Buffett was right to say ‘the world has changed’. Exactly how it will continue to change is anyone’s guess but we can make the transition easier by making the right choices now.

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