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Stockpiling for Brexit? Make sure your credit insurance covers you


By Andrew J Bannister | April 4, 2019

Many businesses involved in the supply chain for vital goods are stockpiling in preparation for any possible disruption after Brexit. While this makes sense in terms of ensuring continuity of supply, businesses must also be aware of the accompanying risks.

With the outcome of Brexit still hanging in the balance, we're finding that many of our food and drink clients are stockpiling produce. That means greater exposure to the risk of a customer becoming insolvent or defaulting on payments at a time when those customers may well be facing their own uncertainties. It also means more of your money is tied up in stock, affecting cash flow – again at a time of uncertainty for all.

Should you have credit insurance, it's time to check that the cover is appropriate for the increased risk. And if you don't currently have credit insurance, it could be time to take a fresh look to check that you're comfortable with your increased customer exposures.

Shortage of warehouse space points to stockpiling

More than half of UK imports come from the EU, according to House of Commons figures.1 This means it is unsurprising that many companies are looking at how they can mitigate potential customs disruption while officials establish new transit and transfer procedures. Evidence for this comes from the UK Warehousing Association (UKWA), which has noted an increase in Brexit-related inquiries.2 Indeed, many of their members are reporting a shortage of space close to major cities.

It seems that large numbers of businesses involved in the supply chain for vital goods, such as non-perishable food produce and medical supplies, are stockpiling in preparation for any possible disruption after Brexit. While this makes sense in terms of ensuring continuity of supply, businesses must also be aware of the accompanying risks.

Three key risks of stockpiling

  1. Stockpiling reduces cash flow and ties up liquid funds. These are funds that could otherwise be reinvested in growth, research and development. If you include the associated costs, such as the storage cost itself, the total amount will be substantial.
  2. Holding more stock could leave you more exposed. This is particularly the case with bespoke product lines held for key customers. Buyers looking to increase their levels of inventory may not be able to generate sufficient revenue to cover the credit, significantly increasing the risk of non-payment.
  3. You may face a double penalty if a supplier defaults. As a supplier, you may be stockpiling key materials for onward sales to your buyers. If they default, you could face a loss on invoices raised as well as the value of work in progress. Remember, the risks of defaults and late payment could be magnified at a time when all UK businesses, as well as many customers and suppliers overseas, are similarly facing uncertainties.

Reviewing your exposures

Credit insurance indemnifies you for the non-payment of trade receivables, reducing the risk of non-payment. This gives you the security of protecting your customer's position, while also potentially supporting your cash flow. But it is not straightforward and there are some provisions within the contracts that will need careful review to confirm that the risk is mitigated:

  • Make sure you're aware of the additional exposures that stockpiling can bring and the implications for their businesses.
  • Review your insurance program to check you have the right level of cover. Consider additional cover if necessary to protect your exposure.
  • Check that your existing policy incorporates cover for work in progress/pre-credit risk. This is especially important if you stockpile bespoke product lines for specific customers.

Check that your insured customer credit limit covers the value of your pre-credit risk costs incurred as well as credit risk balances on invoices already raised.

Brexit is a fluid process and it is possible that it either does not happen at all, or to a very different timetable and in a very different way. For all the uncertainty, experience suggests that companies will need to act now in order to make sure that they achieve the optimal mix of pricing and coverage. As various parties may have noted, waiting is a dangerous game with an uncertain payoff.

1. UKWA: Statement on food stockpiling by UKWA CEO

2. House of Parliament: Statistics on UK-EU trade


Andrew J Bannister
Associate Director, Trade Credit Financial Solutions

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