New Credit Restrictions for Corp Travel Agencies Will Bring Heavier Financial Burdens

The business travel rebound could place undue pressure on corporate travel agency finances, the CEO of a travel management company has warned, and even lead to some going under.

A return to pre-coronavirus levels of bookings should be welcome news after months of corporate travel freezes, but Gray Dawes Group boss Suzanne Horner said some suppliers have stopped offering credit to agencies after their cover was withdrawn by nervous trade credit insurers.

As a result, some of the smaller agencies that previously relied on credit from suppliers will need to fund hotel bookings themselves, or change terms with clients and request payment upfront.

Trade credit insurers cover the risk that a company’s customers cannot pay for goods or services bought on credit. Suppliers, including hotels, take out trade credit insurance to safely sell to customers knowing they are insured should the customer fail to pay their debts.

Insurers will analyze the credit worthiness and financial stability of a supplier’s customers, and calculate a credit limit, which is the maximum amount the insurer will indemnify if that customer fails to pay.

Early Warnings

At the end of March, trade credit insurer Euler Hermes said it had downgraded the risk ratings of 18 countries and 126 sectors, including transportation, due to the risk of a prolonged recession and a wave of bankruptcies caused by the Covid-19 outbreak. Countries that saw their status lowered from sensitive to high level of risk comprised the UK, China, Poland and Turkey.

“It’s not unusual for trade credit insurers to withdraw cover in crises, but credit insurers regularly publish papers on their outlook for the economy or certain sectors,” said Rob Nijhout, executive director of the International Credit Insurance & Surety Association, adding that the association does not comment on decisions made by one of its members.

“In this context, concern can be raised for a certain trade sector. These are forward looking analysis but are not underwriting decisions.”

An individual risk rating decision is determined by multiple factors, including information reports, payment records, supplier’s experience, accounts, visits, ratings and outlook. Nijhout also said credit limit decisions were decisions on an individual legal entity, and not made for a group of companies or an entire sector.

“Individual insurers will be making the own decisions around those firms/sectors that they feel that are either able or not able to offer trade credit insurance cover to and, if they are able to, on what terms,” Malcolm Tarling, the Association of British Insurers‘ chief media relations officer, told Skift, adding it too was unable to comment on specific insurers’ commercial decisions.

But Horner said she believed insurers had pulled credit for all agencies. “As we come out of this, and there’s no credit facility, agencies will have to fund it until the client pays us back, or clients’ credit terms are going to have to be challenged. Because, who pays for all of this if there’s no credit facility? People are saying, when will consolidation happen? Why are we not seeing any businesses going out of business? This is why, because right now everyone’s got cash in the bank after releasing capital back into the bank accounts.”

In a recent Financial Times article that reported on how insurers were starting to pull trade credit protection, Euler Hermes said that certain sectors (such as airlines, travel, automotive, hospitality, construction) were more impacted than the others (such as food delivery, medical supplies) and that it would be reviewing its credit limit decisions.

Skift contacted Euler Hermes for comment, as well as trade credit insurers Atradius and Coface.

Moving in the Right Direction?

However, Euler Hermes launched a tool called TradeScore last week, designed to enable real-time trade risk analysis — but initially only for the U.S. market. It said this will replace the time-consuming process of checking bank and trade references, or consulting often outdated mercantile reports. It allows users to immediately receive an expert assessment of their customers’ creditworthiness.

“This is a positive step, if they’re reviewing it at that moment in time,” Clive Wratten, CEO of the UK’s Business Travel Association, told Skift. “If you had a bad year last year, but having a good one this year, you’d have a bad rating.”

The association’s members represent over 90 percent of UK managed business travel, with $12.5 billion in revenues. “But if there’s no cash in the credit zone, that’s significant to our members,” Wratten said. “You need credit from suppliers to fund the business. If that’s removed, it creates a huge issue for you potentially.”

He said the travel industry needed to understand that credit insurers also have risk, but believes there should be shared risk for economies to start moving again. He also argued there were a number of factors that can bring an agency’s rating down, including when a company is not using credit, which is currently very much the case.

Meanwhile, Nijhout from the International Credit Insurance & Surety Association said suppliers have a choice if they cannot get cover for their preferred premium rate from a certain insurer, and argued there are on average 10 to 15 credit insurers out of which suppliers can choose when looking to buy cover.

Governments across Europe recognize the problem, and are setting up support schemes to avoid cancelations of cover for companies in distress as a direct result of the pandemic. On May 13, the UK government said it would temporarily guarantee business-to-business transactions currently supported by trade credit insurance, ensuring the majority of insurance coverage will be maintained across the market.

However, details of the scheme have yet to be agreed. The Financial Times also reported Euler Hermes had written to brokers in the UK saying it would carry out plans to withdraw cover should the UK not follow the lead of Germany, France and Belgium and provide credit insurers with a backstop. Euler Hermes told the Financial Times it was in discussions with UK government about the protection scheme for cover on buyers in all industries.

Reputation counts for a lot, and in the long-awaited build-up to the travel industry’s big reopening, it’s not just  travelers that need reassuring everything’s safe, but suppliers too.