A leading consultant in Irish and international trade says trouble is in store for European suppliers selling to British small- and medium-sized enterprises (SMEs) that over recent years have switched from letter of credit (L/C) terms to alternative forms of trade financing such as factoring.

Writing in the Irish Examiner, John Whelan says that the spectre of a Brexit-driven rise in insolvencies in the British market could create major finance difficulties.

High risk

Whelan cites credit insurer Euler Hermes' Insolvency Index for 2018, which ranks the UK as one of the highest risk countries with a forecast increase in insolvencies of five per cent in the coming year, compared with a five per cent decrease in insolvencies in Ireland and one per cent globally.

As SMEs in the UK are the most frequent users of factoring to support their sales, this higher risk of insolvency will create problems he argues.

Increased costs

Creditworthy SMEs have turned to factoring to avoid the expense and paperwork demands associated with L/Cs according to the consultant.

If creditworthiness of UK customers deteriorates, then Whelan says he expects trade finance costs to increase.

Some UK SMEs may have to return to L/C transactions if they are insufficiently creditworthy to obtain alternative forms of trade finance.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.