Beware the credit domino effect

Beware the credit domino effect

Interest rates may be nudging downwards, but as Grant Williams advises, the effects of the credit crunch are far from over

Financially the world is changing. The US economy has taken a severe pounding and the effect in the UK is that banks hold debt of questionable value based on US sub-prime mortgages. Uncertain of how much money they may need to cover their own positions, UK banks have become unwilling to lend freely, hence the credit crunch.

One high-profile UK victim has been pub group Mitchells & Butlers (M &B), which saw a major property deal collapse as a result of the rapid deterioration in debt market conditions and subsequent withdrawal by the banks of the credit-approved debt terms.

At the other end of the scale, internet bank Egg has recently cancelled the credit cards of more than 160,000 customers and other banks are offering less generous terms resulting in consumer credit being less easy to come by at a time when every-day costs are rising.

Against this backdrop, the recently published Deloitte Economic Review speaks of the weakest period of growth in 15 years for the UK economy, with a risk of recession in the next two years.

Financial constraints and limited availability of credit can have a domino effect that filters through
to any business. Channel firms need to be alert for indications that customers might be experiencing financial problems.

Do not allow overdue accounts to run on: continuing to supply a customer that is slowing down on payments only shifts the problem onto you. Ensure that credit checks are carried out on any new accounts. Beware of customers that switch to a new supplier because they have reached their credit limit with
existing ones.

Consider credit insurance to protect against potential bad debt. Look at alternative ways of increasing cashflow. Receivables finance can advance up to 90 per cent of the value of invoices immediately.

The channel should accept that the credit crunch could reach them and make sure they know their customers. Forewarned is forearmed.

Grant Williams is senior manager for risk at Coface.