HMV likely to survive, but other retailers may not be so lucky

HMV suffered a huge blow last week when trade credit insurers scaled back cover. The City feared the pulled trade credit could lead to its suppliers deserting the business, leading to its demise.

In the end, HMV narrowly avoided the fate of Woolworths, which collapsed in 2008 after trade credit insurers pulled cover.

So how much of a factor is pulled trade credit insurance in sending companies into administration?

Serious power

Peel Hunt analyst John Stevenson believes trade creditors have the power to sink firms. He says large firms such as Land of Leather and ScS Upholstery were particularly hard hit in 2008.

“Credit insurance really did put them down as far as I can see," he said. "For others, it just speeds up what would have happened in any case.”

Big suppliers, better chance

But Stevenson believes that when you have a large corporate, such as HMV, with equally large suppliers who have deep enough pockets to self-insure or absorb potential losses, they are less likely to cut and run.

HMV kept its suppliers, and could continue to trade.

When it gets tricky is if a business relies on several small suppliers that can’t afford to have their cover scaled back. The suppliers might not have the capacity to absorb the financial loss of unpaid stock.

Furthemore, the banks might require smaller SME suppliers to have trade credit insurance cover in order to operate.

Strength in numbers

Marsh EMEA trade credit practice leader Tim Smith points out another potential problem. “If you have one key supplier and that supplier is insured, then their credit limit is pulled and they decide not to trade, that can be catastrophic.”

So it certainly seems that trade creditors can have a significant effect on sinking a company if they pull cover on smaller suppliers.

Bigger firms, using an array of larger suppliers, have a better chance of pulling through.

Only doing their job?

Yet many within the insurance industry believe pointing the finger at the trade creditors is pointless.

One spokesman from a trade credit insurer says that his first responsibility is to his clients. He thinks that company directors, shareholders and banks needed to step up and take more responsibility for failing companies rather than blaming trade credit insurers, who simply react to the bad health of a company.

The spokesman added: "We have no means to redress it. Unlike banks, who can decide to lend more, unlike shareholders who can decide to raise funds, unlike directors, who can take management actions, there’s nothing we can do as insurers. The only thing we can do to protect our suppliers is to reduce or cut cover."

Trade creditors monitor a company’s financial health very closely, and if they believe it is in such an unhealthy state that its suppliers don’t deserve cover, their judgement should be trusted.

As the old saying goes, you’ve only got yourself to blame.