This blog was originally written in November 2012.
"The sad news from Comet is a lesson for us all. Comet’s problems are well documented, as was its sale to the private equity company OpCapita for a reported £2. In reality, OpCapita was paid the sum of £50m by Comet’s then owners in order to persuade OpCapita to take the business off their hands. A rescue plan was enacted under the veteran retailer John Clare, the former chief executive of Dixons. Recent reports suggest that significant progress had been achieved with costs slashed and sales stabilised.
So why the current demise? According to reports, suppliers to Comet have been unable to secure credit insurance and were therefore forcing Comet to pay in advance for their stock. And the final straw appears to have been the need for additional stock in order to cover the Christmas period.
And why is this, a lesson to us all? The fact is that there are a limited number of companies that are willing to offer credit insurance in the current uncertain times and, unsurprisingly, there is a tendency for these credit insurers to specialise in a particular market. In other words, it would not be surprising to find that several of your suppliers are using the same company to insure your debt with them.
The problem arises when the total amount insured starts to rise. Your credit rating might be excellent, but may not be sufficient to persuade a credit insurer to take the whole risk on their books. Interestingly, in my experience, when one insurer is insuring one company’s debt with lots of suppliers, it is often the small supplier that receives a refusal to insure. They are never told the real reason – that the customer is a good risk, but that the insurer is too heavily exposed – they are merely told that the risk isn’t covered. The supplier assumes that there is a problem with the customer, when it may actually mean that the supplier’s account is less important to the insurer than those other accounts that the insurer continues to cover. Either way, your debt with your supplier is no longer insured & your account might well be placed on stop.
So what can you do to mitigate this risk?
- Regularly review your credit rating with all the major rating agencies. You check out your customers, why not check your own. A client of mine discovered a disastrous credit rating following his best ever year. The credit rating agency was happy to investigate and discovered a data entry error, which they were pleased to correct.
- Ask your suppliers who they use for credit insurance. If you are lucky, you will discover a diverse range. If you are unlucky, you can be put on alert of a potential problem. Always react to requests for additional information from credit reference agencies or credit insurers. Build a dialogue with the credit insurance providers. This might initially arise from a refusal to insure. Don’t ignore the problem, talk to the insurer. They will always welcome explanations and trading updates, particularly in the period between your accounting year end and the date your accounts are filed at Companies House.
- Talk to your supplier and let him know the results of your research. Again, a client of mine was refused insurance on an amount of a few thousand pounds, whilst the same insurer was willing to cover debts amounting to hundreds of thousands of pounds, but where the supplier they insured was a far bigger company. In this case, the supplier who had been refused cover was willing to continue to supply without cover.
But whatever you do, manage the risk."