By Richard Willis, Managing Director, Willis Insurance and Risk Management

Thousands of businesses are still reeling from the collapse in January of Carillion, one of the UK’s largest and best-known construction firms.

The failure of the company has had a devastating effect, not just on those it directly employed, but on an estimated 30,000 individual businesses that formed or supported part of its supply chain.

For some of those firms, Carillion’s inability to pay its suppliers will have sounded their death knell, while for many others, it will have further pressurised already heavily-squeezed cash flow.

The situation presents a stark reminder of the significant risks faced by any business that provides goods and services on credit terms and the danger of not being adequately protected.

Carillion is certainly not the only high-profile trading failure to have occurred in recent months. Monarch Airlines, which collapsed with debts of almost £500 million and grocery wholesalers Palmer and Harvey which entered administration owing £700m are just two of the other big-name businesses that have gone to the wall.

It is unsurprising therefore, that we are seeing more businesses seek the protection of Trade Credit Insurance to guard against the risk of incurring bad debts.

In the case of Carillion, trade analysts have suggested that around £31m will be paid out by insurers, in settlements ranging from £5,000 to several million pounds, to suppliers that had Trade Credit Insurance policies.

This, however, represents just a fraction of the company’s £1.5 billion of debts.

Such policies provide peace of mind to suppliers while cover also prevents losses being incurred on pre-delivery costs and will protect a business against the impacts that result from Letters of Credit and prepaid orders not being honoured.

Business trading advantages can also be enjoyed. Trade Credit Insurance provides a business with more freedom to grow, enabling it to extend more credit to customers, because of the safety net it has in place. It will also enable the firm to attract favourable financing and enhance its balance sheet, through higher profit margins.

For any economy to be successful, it relies on a mix of large firms flourishing across multiple sectors, supported by a strong supply chain network, that must be protected.

Seeking professional guidance will assist suppliers in the process of identifying all challenges faced by their business and the measures that could prevent them arising in the first instance and ensure they aren’t left counting the cost when a major customer collapses.