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Carillion, the Bad-Debt Domino Effect, and How to Avoid It

March 2018

Another construction firm has gone bust, but this time it has attracted more attention than usual. Carillion’s suppliers are said to be owed a hefty £2 billion. This will have a knock-on effect for tens of thousands of businesses.

The small firms that handled most of Carillion’s work will sadly be those most affected by its demise. Many will never get their payment, damaging a supply chain that is already under immense pressure.

Too often, the smaller businesses who supply behemoths like Carillion are the ones left to pick up the pieces, after the management and secured creditors have taken their slice of the pie.

In Carillion’s case, the Financial Reporting Council (FRC) says it is investigating KPMG’s audit of the company’s financial statements, ahead of its collapse. This raises issues of trust. If we cannot trust the auditor’s account of a company’s performance and financial health, what can we rely on? Already, Capita is slashing its profit forecasts and Laing O’Rourke is reportedly asking suppliers for a further grace period on its outstanding debts announcing a loss of £67million this year.

The publication Construction News found that last year Britain’s ten largest builders made a combined pre-tax loss of £53 million; the average pre-tax profit margin was -0.5%.

Construction is a critically low-margin industry in which receivables can represent the largest unsecured asset. Subcontractors are particularly at risk as main contractors falter. An observation of the supply chains involved within construction contracts highlights a significant increase in insolvencies across the industry over the last 12 months. But this situation can affect any sector. Maplin and Toys “R” Us are two high street names that have suffered this fate. Retailer New Look and of course restaurateur Jamie Oliver have also had to go through drastic re-structures to remain viable.

Helpfully, there is a means of protection available to a very wide range of businesses - Trade Credit Insurance. This provides peace of mind, along with comprehensive protection against the risk of customers becoming insolvent. Having this in place can enhance customer relationships, lead to improved access to finance for the policyholder, and boost confidence in pursuing commercial opportunities.

As a Trade Credit Insurance policyholder, you would also have access to skilled risk analysts who have sector-specific knowledge that could prove an invaluable addition to your existing credit management processes. There is also access to up-to-date credit information, from both within the UK and overseas.

With the domino-effect of Carillion’s collapse likely to continue for a while to come and the talk of darker clouds on the High Street, perhaps now is the time to speak to us about the benefits of Trade Credit insurance protection and how is can help your particular circumstance?