PAFA, the trade association for the UK plastics film and flexible packaging industry, has warned Chancellor Alistair Darling and Business Secretary Lord Mandelson that its customers - “who operate viable businesses essential to sectors such as the nation’s food supply - are under threat as the credit insurance system is pulling the plug on essential financial insurance on customer debts to suppliers”.
Referring to the crucial role of flexible packaging for the retailer and consumer, PAFA chief executive David Tyson said: “We welcome the action being taken to support banks in order to free up lending, but not all companies rely on conventional overdrafts. There is a considerable reliance on debtor insurance and the companies responsible for providing this are not directly the banks.
“The process by which banks secure a charge over a business customer’s debtor book and re-insure the charge through credit insurance providers means the banks take little risk at all. The risk is borne by credit insurers - mainly operating out of mainland Europe - and they are now withdrawing their support from UK businesses. As a result, our industry is being forced to take the full credit risk of customers for no justifiable reason, with potentially serious effect on cash flow.”
PAFA emphasised that the current system largely replaced the traditional overdraft which was once the main route to working capital. As overdraft facilities were withdrawn for many SME’s, regardless of how stable they were, many packaging businesses were left to seek continued cash flow and growth secured by insurance on their strong collectable debtor book.
David Tyson explains: “Now we are getting reports of four or five member companies every day being notified of the withdrawal of credit insurance on their customers. This is also starting to apply equally to the packaging producers with regard to raw material supplies, in spite of the fact they have strong order books and strong, collectable sales invoices."
As a result of the increasing instances of credit insurance withdrawal, PAFA has requested immediate action from the Government “to halt the unnecessary withdrawal of support by the principal Europe based credit insurance companies”.
He concludes: “Our investigations show that there are three main credit companies involved and I have written to ‘name and shame them’ at the most senior ministerial levels. The Government needs to address this issue with them directly and urgently. We are not asking that poorly operating companies get debtor book insurance but it is totally unacceptable that financially viable businesses are being targeted simply because of the manufacturing sector and the country they operate in.”
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