Having spent the best part of a decade working inside a Credit Insurance & Surety Company, I saw a lot of companies lose Bond Capacity and Credit Limits for avoidable reasons. To help other businesses avoid such pitfalls, I have composed a list of the top ten preventable reasons that companies lost Surety and Credit capacity.
1. Late filing of Audited Accounts or late filing by your own standards.
Credit Insurers automatically monitor businesses and their filings, as such you should aim to file your accounts at approximately the same time each year. If you rush out good news, the general opinion of the underwriters is that you will then withhold bad news and this could have an effect on your limits.
2. CCJs.
Many Credit Insurers will automatically cut limits if a CCJ appears on your company's record. If they provide a lot of cover to your suppliers then they will probably contact you for additional information on this. If however they only hold a small amount of limits, these might be automatically pulled regardless of their importance to your business. Settling a CCJ quickly can be much easier than arranging for your limits to be reinstated.
3. Dividends in excess of profits.
If you've had a bad year then it might be beneficial to postpone your dividend payment if possible or at least try to reduce it to a level below retained profit. Whilst this seems harsh, it is the excuse that I have heard as the reason for cutting a limit or rejecting to provide additional capacity on many occasions. Whilst dividend timings have tax implications, loss of limits may have serious unknown consequences for your business.
4. Refusal to provide MI (Management Information).
Whilst a credit insurer might not be doing business directly with your company, they can be a large stakeholder in your business regardless of whether or not you'd like them to be. Providing them with the most up to date information possible will help to maintain credit limits and give you the benefit of the doubt with the underwriters should you require it. You should also ask your Surety Broker what they can do for you. Most will know whom to pass your accounts to within an organisation and can do so on a regular basis as and when they circulate your accounts to your Surety providers. If you are worried about confidentiality, the Insurers are regulated by the FCA and as such are only able to use your accounts for underwriting purposes and they may not discuss the content of these with any of their clients. All insurers will happily sign an NDA (Non disclosure Agreement) to this effect if you wish to secure additional protection. Although for the sake of speed, try and work with their template NDA.
5. Poor Quality Management Accounts
Related to point 4, the quality of your management accounts is quite critical to the underwriters. Whilst your format might be all that is required internally, it is beneficial to produce accounts in a similar format to those that are filed at year end. If there are any confusing elements to your accounts you should try and expand on these if possible.
6. Death by Association
Insurers can take a dim view of your business if one of your directors has links to a previously failed business, especially if the insurer took a big hit due to that specific failure. A client of mine was recently declined a Surety facility based on his past directorships. A brief conversation revealed that he wasn't a shareholder of the failed business and had cleared out several years before it failed thus placating the Underwriter and allowing him to provide terms to my client. If your directors do have links to a failed business try to provide more details of those links to the insurers.
7. Not using a Broker
Should you ever suffer reduced limits or be declined Surety facility then a broker can really help to facilitate the reopening of those lines or help get to the bottom of the matter and establish the real reasons as to why negative steps have been taken. Whilst working as a Surety underwriter, I received many calls from Surety clients whom had lost Credit limits but didn't know how to get hold of the correct Credit underwriter responsible. Not all companies have Surety facilities with each and every credit insurer so won't have a direct route in but a broker should be able to provide you with a contact at each and every insurer. Just another indirect benefit of using a good brokerage.
8. Blocked Limits
Leaving old Bonds or Credit Limits to stagnate can prevent you from doing future business with other parties. Always ensure that your Bonds are released upon completion of a project or whenever release is due to occur. A decent Surety Broker should chase you for release certificates and provide you with a comprehensive breakdown of your facility utilisation and details of live bonds. Likewise, if you no longer use a supplier that you know credit insures and you are unlikely to use them again then kindly ask them to cancel their limits on you. This will save them premium and produce additional capacity for your current suppliers and additional credit for you. If you don't feel comfortable doing this then ask the Insurer to do a "ring-around" of policy holders to see which ones are happy to give up their limits.
9. Use of invoice discounting
Whilst your decision to use of an ID line is no business of the insurance market, they don't tend to view this as a positive and it will have effects on your limits. This is especially true if you work in construction.
10. Surprises
Some people like surprises but those working in financial services do not. If you have some bad news to release in your next set of accounts, it is a good idea to break this to your Surety or the Credit Insurers backing your limits as early as you can. Insurers tend to conduct a market exercise following a big failure in your sector and this can involve wholesale limit cuts as they don't have a chance to get hold of everyone. If there has been a failure in your sector try and be proactive, let them know the effect that it has had on your business. If there hasn't been one then show off your risk mitigation skills and highlight this. I predominantly work in Construction and the key question on every new enquiry from the insurers is "How much did your client lose when Carillion went bust?".
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