Insurers’ refusal to provide non-payment cover means firms will ‘fall like dominoes’, experts warn

Tighter restrictions on credit insurance will force smaller contractors and housebuilders to the wall, financial experts have warned.

The claim comes after some insurers have reduced or withdrawn cover owing to instability in the market (see box).

Credit insurance covers suppliers and subcontractors against non-payment of bills by those further up the chain, but has been increasingly difficult to obtain amid concerns over high debt and poor cash flows.

One insolvency industry source said: “You will see lots of casualties early next year as the effects kick in. If insurance is withdrawn or reduced, suppliers will give less credit and demand shorter payment times or cash on delivery, which will play havoc with cash flows.”

He said it would be a bigger problem for SMEs because larger companies had bigger overdrafts and more muscle to impose their own terms on suppliers.

Another source said: “These ancillary insurance industries hang off the construction sector and once they dry up, companies start falling like dominoes.”

Graham Bristow, a trade credit expert at risk management group Aon, said credit insurance cover for housebuilders had fallen by between 50% and 100%. He added: “Companies working for Taylor Wimpey will struggle to get it at all.”

Meanwhile, tighter controls on performance bonds will also push companies over the brink, other sources claim.

Performance bonds are provided by banks and insurers as a guarantee for the client if a contractor goes bust. Some clients refuse to award work without a bond.

One senior insolvency source said: “I know of one big contractor in the Home Counties that nearly went bust because it had trouble getting a bond.”

Cover crisis

Last month insurer Amlin announced it would withdraw from the credit insurance market in 2009. It was the UK’s fifth largest provider after Euler Hermes, Atradius, Coface and AIG. Meanwhile, Peter Mandelson, the business secretary, launched a code of conduct to encourage the prompt payment of bills.