Why trade credit insurance has never been more important for recruiters
The liquidation of a single company can have huge knock-on effects to the businesses it deals with. As the number of liquidations may continue to increase in 20191, the effects will be felt by more businesses, including recruitment companies.
Recruitment companies are generally involved in contracting and/or temporary labour, so they must pay wages before their client has paid them. This makes them highly vulnerable to cash-flow problems and insolvencies among their client base. If their invoice is not paid, by law they are still obliged to pay the individual contractor/temp who has completed the work.
Brexit uncertainty and continued economic volatility mean that the environment is likely to remain tough for some time. We could see more insolvencies, and recruitment companies being hurt as a result. Now is the time to prepare.
According to the UK Government Insolvency Service, the number of insolvencies (excluding bulk insolvencies) increased in Q1 2018 to the highest level since Q1 2014. This was driven by a rise in underlying creditors’ voluntary liquidations, and compulsory liquidations.
Concerns about a no-deal Brexit have also increased risks of some companies stockpiling goods. This could affect recruitment companies in unexpected ways. Stockpiling could reduce buying companies’ cash flow, particularly if they have to spend more on storage. This potentially increases the risk of buyers defaulting on their obligations to pay back recruitment companies.
Due to these heightened risks, it is crucial to ensure adequate measures are in place to protect against possible non-payments.
Protection and continuity
In this politically uncertain climate, it is essential that recruitment companies check the level of credit insurance cover they have in place.
Of course, most recruitment companies use invoice discounting2 to help with their cash flow,with some facilities including ‘bad debt protection’ (BDP). However, once companies grow, they are likely to get a better price and level of protection by sourcing their own credit insurance policy. This can then be used as security to underpin the balance sheet/debtor book.
The vast majority of recruitment companies have very few assets other than their debtor book. Securing this debtor book, by means of a credit insurance policy, gives all interested parties considerable comfort.
Credit insurance policies rely on signed time sheets as a strong base for a debt. They will look at potential loss that may arise in respect an unsigned time sheet – something that is not always covered by funders’ BDP arrangements.
Many UK recruiters face uncertain times, but trade credit insurance remains a valuable tool to ensure that they are adequately prepared.