Empowering Renewable Energy Growth: The Crucial Role of Trade Credit

The renewable energy sector has seen remarkable growth in recent years,¹ driven by increasing awareness of environmental sustainability and the need to transition away from fossil fuels. The proportion of heat from renewable sources, such as heat pumps, has steadily increased in the UK, from 1.8% in 2007 to 7.3% in 2021. In 2022, 40% of electricity came from renewables.

Clean energy generation holds a central position in the UK's plan to achieve net-zero emissions by 2050,² as the government establishes a goal for energy providers to ensure that all electricity is sourced from 100% zero-carbon generation by 2035.

How trade credit can help facilitate growth

Trade credit is a valuable tool that enables renewable energy companies, such as solar and wind farms and anaerobic digestion plants, to manage their cash flow, obtain essential resources, and drive growth in a capital-intensive industry. It plays a pivotal role in supporting their expansion, sustainability, and ability to compete effectively in a dynamic market.

Facilitating access to financing

The renewable energy industry requires substantial upfront capital for infrastructure development, equipment procurement, and project execution. Trade credit allows renewable energy companies to buy the necessary materials and services without immediate cash payments. This enables them to initiate and scale their operations more quickly.

Trade credit also enhances the financial stability of renewable energy companies. These companies can manage their cash flow more effectively by deferring payment for goods and services. This helps them to allocate resources to critical areas such as research and development, project expansion, and maintenance, all of which contribute to sector growth.

What is trade credit insurance?

Trade credit insurance helps protect against customers failing to pay invoices provided on a credit basis (where the buyer pays later).

It safeguards against the risk of non-payment by their customers. In the energy sector, projects can be substantial and involve significant financial commitments. If a customer fails to pay or defaults on payments, it can severely impact the company's cash flow and financial stability.

However, trade credit insurance doesn't only help businesses operate when another company can't pay due to insolvency or lack of funds. It can also accelerate growth by safeguarding cash flow. Plus, it could help a business to succeed when operating with unfamiliar customers.

Managing supply chains

Renewable energy projects, such as solar and wind farms and anaerobic digestion plants, often involve complex supply chains with multiple suppliers. Trade credit insurance can help mitigate the risks associated with supplier defaults or disruptions in the supply chain, ensuring that projects stay on track.

One of the primary challenges facing renewable energy projects is the high initial costs associated with equipment such as solar panels, wind turbines, and energy storage systems. When suppliers have trade credit insurance, it provides renewable energy companies a lifeline, allowing them to access vital equipment and technology on credit terms. This helps reduce the barriers to entry, making it easier for startups and small enterprises to participate in the renewable energy sector and contribute to its growth.

Protection for renewable energy businesses

This insurance doesn't just protect finances. It also gives banks and business partners peace of mind, knowing loans will be paid despite supply chain issues.

Maintaining strong relationships with customers and suppliers is crucial for long-term success in the renewable energy sector. With this insurance, renewable energy businesses can offer their loyal customers credit terms while keeping an eye on any insolvency risks. And when it comes to new customers, the business can confidently approach them without worrying about late payments or insolvency concerns.

Dealing with unpaid invoices

Non-payments and delays can have a massive impact on cash flow and operations, which could put a renewable energy business at risk.

In 2023, thousands of businesses in England and Wales went bust, and insolvencies were up 10% from a year ago in the three months to September 30, 2023.³

As businesses grapple with the risk of shutting down, some might struggle to keep up with their obligations to renewable business suppliers or service providers. They may need to delay payments to handle their finances.

Protecting your renewable energy business from trade credit risks

Trade credit insurance offers distinct benefits, particularly in the areas of risk mitigation, growth, and enhancing working capital. In summary, for businesses in the renewable energy sector:

Risk Mitigation

• Helps protect businesses against the default of their customers, reducing the risk of non-payment.
• Can enhance credit management by offering insights into the creditworthiness of potential customers.

Growth

• Can facilitate business expansion by enabling renewable energy companies to safely offer more competitive credit terms to new and existing customers.
• Helps increase confidence in exploring new markets or expanding the customer base without fear of significant financial loss.
• Helps secure better financing terms from banks, as insured receivables are often viewed as more secure collateral.

Enhancing working capital

• Can improve cash flow by protecting against late or non-payment, ensuring more predictable income streams.
• Can lead to improved borrowing terms, as lenders may view businesses with insured receivables as lower risk.
• Allows businesses to release capital as a buffer against bad debts, reallocating resources for growth and operational needs.

For more information about trade credit insurance, visit our trade credit page.

We will also be holding a trade credit insurance webinar in February, when leading industry experts will discuss the latest insights.