Is credit insurance becoming an issue again?

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Well, I'm not too surprised.

In June we saw big high-street names like HMV, Habitat, CarpetRight, Thorntons and Jane Norton closing down shops or going to administration. And the news since then has, if anything, only made consumers more cautious about spending, especially on big-ticket items. In turn, this has retailers planning earlier and deeper Christmas sales to bring the punters in. So it is inevitable that with retailers nervous about sales, their banks and credit insururs get nervous about their exposure to the retail industry.

Cue today's story in the Financial Times on credit insururers keeping an eye on the retail industry:

If a retailer's finances are considered too risky, trade credit insurers can withdraw or restrict levels of cover being offered to their suppliers with potentially disastrous consequences. As seen with HMV and Woolworths this can disrupt the supply chain and cause a squeeze on working capital, which a retailer may not survive.

In the depths of the last downturn (take a look at our coverage here, here and here), much was made of the unsophisticated, blanket approach credit insurers took to withdrawing coverage from manufacturers. It didn't matter what the companies sales, markets or financials looked like, if it was exposed in anyway to the auto industry or to construction, then coverage was withdrawn.

The FT's article picks up on a key point of advice: keep close to your credit insurer so they have greater knowledge - and hence confidence - in your business.

Yet this approach didn't help some manufacturers last time round, and many have stopped using the product altogether. And others may be wary of sharing financial data with insurers because they've been burned by a similar approach with their banks.

We'll be watching to see if and how this credit insurance develops. The linke between retail sales, auto sales and manufacturing is how the credit insurance problem spilled over from the high street to industry. Hopefully it won't happen again.

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