Credit insurance trap for UK retailers
Robert Peston discusses the difficulties that retailers (or their suppliers) are having getting trade credit insurance. Fundamentally, information asymmetry combined with efficient use of capital causes this problem. The reason suppliers want insurance is because the economy is shrinking and a (small but significant) percentage of retailers and wholesalers are going to go under. Even though the number is small (I'd estimate 3 to 5 per cent), the problem is that nobody knows which ones. Therefore unless suppliers stop trading altogether, they want to be covered for the risk. I read a nice analogy recently: if someone gave you ten bottles of water and you knew one was poisoned, you probably wouldn't drink any of them. Even if you were really thirsty. This combines with the (quite correct) desire of retailers to minimise the amount of working capital tied up in their supply chain in order to be price competitive and profitable. Therefore they extend payment terms to the degree th...