Analysis

Last week, printers faced the gloomy warning that credit insurers to the print industry are reducing limits and altering terms. It was another blow for an already beleaguered sector and the trend could exacerbate the challenge the industry faces.

There are many reasons for insurers to cut back on credit limits, all of which are a result of, or perpetuated by, the wider economic climate. As they offer companies protection against unforeseen losses, such as a customer’s inability to pay, insurers are naturally more cautious in a period of high economic risk. Furthermore, a rise in company insolvencies, which would be a usual result of an economic downturn, will inevitably lead to a reduction in credit limits.

Additionally, with cash flow pressures on the increase, banks are less likely to offer financial assistance. As a result, a vicious circle has emerged with reduced credit limits putting a further strain on companies’ cash flows rendering them a greater credit risk.

Open dialogue
However, there are measures a company can take to protect itself. According to merchant and credit insurer Aon, it is essential to communicate with your suppliers. An open dialogue between a company and its suppliers will provide much more detailed and up-to-date information and this can be key in allowing printers to keep their credit levels as high as possible.

James Bowker, account director for the paper sector at Aon, agrees that responding to requests for information can help, while a non-response is one of the biggest causes of credit limits being curtailed. And this is echoed by Martyn Eustace, the former chief executive of Premier Paper: Merchants are far more accommodating when they feel they are being given accurate information, he says.

Ramifications
However, the amount of finance being provided against debtors is a worry for print-industry insurers and even a small change in financial circumstances can have significant ramifications. A fall in sales will reduce borrowing capacity and banks will not hang around when their security has disappeared, says Eustace. Some banks are already trying to reduce their exposure to the sector and are likely to extract their money very quickly if they see difficulties ahead.

Jim Tunstall, managing director of merchant Connect 2 Paper, says his business has had recent experience of credit lines being withdrawn on print customers, affecting the company’s cash flow. We are a very small business and operate in diverse markets, he says. As such, we have an opportunity to reshape our business. But undoubtedly these are difficult times for printers and merchants alike. Not getting it right, in terms of both risk and cash management, could be fatal for businesses. Just how fatal is open for debate, but the question remains as to how the curtailing of credit insurance will affect the rate of business failures.

Mike Gee, managing director of paper merchant Denmaur Group, says an inability to secure credit lines is a key contributor to business failure. With the action of some financial institutions, credit insurers are taking a more prudent view on the back of some considerable losses over the years, he says. But if printers co-operate, there’s still a willingness to insure.

Ian Carrotte, managing director of credit-checking agency ICSM, says things are inevitably going to get worse, but argues that this is not because of the insurers. Stronger companies will survive the current widespread financial crisis and weaker ones will fail, he says. Carrotte reiterates that the printer is very much responsible for its image within the insurance community. Insurers simply react to the perceived state of the printer’s books, he adds.

Early warning
The health of the print industry has taken a turn for the worse this summer. There have been a number of company failures recently, which has had an effect on the level of risk finance firms are prepared to expose themselves to. However, even in hard times, printers need to keep suppliers to terms. Alasdair Browne, director at trade printer Abbot Print, isn’t surprised that credit limits are being reduced or cancelled. I would imagine it’s getting more difficult for insurers to underwrite insured sums, he says. But if they are in the game of providing insurance, that is what they should be doing – not just when the risks are low and the rewards are high.

Credit insurance is an essential element of modern business. Yet the insurance company retains the right to reduce or cancel the limit. Carrotte says that this is an early warning to the insured and should act as a catalyst for closer inspection. When printers have their credit limit withdrawn or reduced, the reason is usually the printer themselves. If they have a history of bad payment, or bad financials to suppliers that insure, the insurer will react, says Carrotte. So just make sure you always pay your suppliers on time.