Credit insurance: The hidden data-driven force which killed Comet

A quick look at what happened to high street electronics retailer Comet when its credit insurers slammed their wallets shut should be enough to get any IT business interested in cash-flow, insurance and credit lines. But while credit and cash-flow are often seen as stale subjects, they can be the lifeblood of business - almost …

[Anonymous Coward]

erm

Comet was bought to be asset stripped and raped. Anon for a reason.

[The Godfather]

Re: erm

Quite possibly true as many such 'turnaround' investors follow this path. Let's be frank, insurance cover on Comet was subject to flux as way back as 2008 and probably hinged on the strength or guarantees of the then parent. Once Comet was sold to Opcapita (who's track record was not sound), not surprisingly, credit insurers were no longer willing to grant cover. They are not suicidal.

[Anonymous Coward]

2k -> 10k credit card

The 18 year old with the 2k -> 10k credit card sounds like my student days.

Took me ages to pay it off, but still, that and a minimum wage part time job got me the piece of paper and a few beers!

[Lee Dowling]

Re: 2k -> 10k credit card

When I was a student, Barclaycard gave me a credit card. Used it for years on a "debit card" (i.e. paying it off even before I'd spent the money) basis while they slowly ramped up the credit limit to some 3.5k. Strangely, years later and when I then needed it, they refused a £100 increase in credit limit (by which time I'd brought that limit down to £500).

Credit card companies WANT you to be in debt. That's their entire business - keeping you hanging around as a debt for as long as possible. When you don't use it, it costs them money. Business credit, on the other hand, wouldn't be so stupid. Offer 30-days of credits, then send in the dogs, and never let you have more than you can pay because you *will* just declare bankruptcy/administration and they'll see nothing of your money. People tend to avoid ever having to do that, businesses will do that the second they spot trouble.

I'm honestly surprised that the world even works on credit so much. Giving someone millions of pounds worth of stock on credit seems utterly stupid, whether they are a big name or not. If they fold, you will lose the stock and the money and have to pay more money to see anything back (if at all). Small businesses have small business loans from banks to buy stock from suppliers in "real" money. Once you get to the scale of having a branch in every town, I'm amazed that you still need to get credit from your suppliers and can't just pay cash.

Are you telling me that even places like Tesco aren't paying their suppliers as they order goods (or even on delivery) but months later? It's really no wonder that things are as fragile with the economy as they have been recently. And it's not even necessarily a sign of business performance. If your "credit line" drops for any reason (bad economy, lots of fraud with that supplier's other customers, etc.) then you're going to be in trouble and there's nothing you can do about it.

Just seems to me to be asking for trouble. Sure, you probably can't survive as a business without taking "credit" somewhere, whether from a bank or suppliers, but basing your business on some random-but-vital third-party not pulling the rug out from under you seems more than a little dumb, especially if you're making millions of pounds each year.

[AbortRetryFail]

Re: 2k -> 10k credit card

Martin Lewis has always maintained that you should substitute the word "credit" for "debt", to really underline what it's all about.

That gives you such gems as

* 'Debt card'

* 'Interest-Free Debt'

* 'Debt Agreement'

* 'Instant Debt'

[AceRimmer]

Re: 2k -> 10k credit card

That is indeed how businesses work

Never pay up front if it can be avoided. Especially if you're a big company. If someone is willing to give you 30 days to pay for goods then that's an extra 30 days you've got to put your cash to other uses.

If you can push those payment terms without penalty then even better, 60 days... 90 days?

Also, the people who place an order for someone like Tesco's are not the same people who pay the bills. Stock control and buyers place the orders. The accounts payable department will deal with the invoices as they come in, matching them up to the orders placed and authorising them for payment (and then yet another department will make the actual payment)

[Anonymous Coward]

Re: 2k -> 10k credit card

I did learn my lesson.

All paid off, no credit / "debt" card to my name. Bit of a nuisance on business trips, but then I just dip into savings and use a prepay foreign currency card.

[Red Tie]

Re: 2k -> 10k credit card

The majority of companies operate on credit terms when dealing with suppliers. The company I work for normally pays important suppliers within 30 days, whilst other less critical suppliers are paid within 60 to 90 days. The larger suppliers can comfortably operate on 60 to 90 day terms because of their income from many clients and may have better credit lines, whereas a smaller company with less clients, income and tight credit lines are more reliant on clients paying them promptly to keep afloat.

Sainsbury's have recently increased their payment terms for suppliers from 45 days to 75 days and have recently refused to sign up to the Prompt Payment Code (PPC). They justified it by pointing the finger at their competitors by saying they are worse. Linky: http://www.businesszone.co.uk/topic/finances/mp-attacks-sainsburys-over-late-payment-suppliers/44993

[SImon Hobson]

Re: 2k -> 10k credit card

>> Sure, you probably can't survive as a business without taking "credit" somewhere, whether from a bank or suppliers, but basing your business on some random-but-vital third-party not pulling the rug out from under you seems more than a little dumb, especially if you're making millions of pounds each year.

Well the reality is, that for most businesses they cannot work without offering credit lines. Unless you really are the only outfit in the area/county/country/world selling a particular type of widget - then you have to offer an overall deal that's better than others selling the same widget. Everything else being equal, your business customers will buy from your competitor instead of you if you don't offer credit and your competitor does.

Even if you don't give credit, there is normally still gap between buying and getting paid. Eg, you buy some hardware (maybe from different suppliers, and possibly one small part is delayed), you put it all together, install software, configure stuff, etc, etc. In other businesses, you may be buying raw materials and putting them through a lengthy manufacturing process. Or you may need to buy some stuff in for stock so as to be able to respond to requests at short notice. Eventually you are ready to deliver to the customer - and even if the customer hands over the money on delivery, you have still had stuff in your possession for a period of time.

Now, you cold buy in your materials and pay cash - but that means you have to pay out some time before you get paid yourself. This can work, if you have enough cash. But the more business you do, the more cash you'll need to cover this gap - hence you may hear of companies needing cash to expand (you can't sell more because you don't have the cash to buy stock/materials, you can't make that cash without selling more).

Now if you can buy in your raw materials/stock on a credit line - then with luck you can get paid before you need to pay your suppliers. That means you can afford to do a lot more business.

Lets put that in perspective by adding some numbers to a very simplistic scenario. You are a medium size business turning over (say) £1M/month. For simplicity, we'll ignore profit margins, overheads etc ... And we'll assume that on average, stuff goes out the door one week after it comes in.

a) You buy cash, and sell cash. You need enough spare cash to pay for about 1/4 of a month's worth of inputs before you get paid for it. So that's £250k needed - permanently tied up.

b) You buy on 30days, and sell cash. Now you get paid 3 weeks before having to pay your suppliers - so that changes from needing £250k of spare cash to tie up, to having £750k in the bank.

c) You are in the unfortunate position where your customers demand 3 days credit, but your suppliers won't give you any. You now need 5 weeks worth of capital - so you need £1.25M to spare !

Put another way - for every day you can get your cash in sooner, you'll have around £50k more in the bank (assuming 20 working days/month). Similarly, for every day you can hold off paying your suppliers, that's another £50k in your bank.

Obviously the figures change once you consider overheads and profit margins, but is should give some idea of the issue that businesses face.

Most businesses fail due to cashflow problems - often with healthy order books. Without either good credit lines from their suppliers, or loans (typically working capital facilities from the bank) then they simply don't have the cash to buy the inputs needed to meet their sales/orders. This constrains what they can sell, hence the profit they can make, and so they can get into a spiral of restricted sales -> reduced profits -> reduced cash available -> further restricted sales -> ...

[pullenuk]

tesco

Yup, supermarkets pay after they pretty much sold it.

[Anonymous Coward]

When I was at Comet a couple of years ago they were pushing all suppliers for at least 60 day payment terms, and 90 days if they could get away with it..

[tin 2]

BUT

If it makes sense for companies to always pay as late as they can, while they make millions of £ a year in good times and *could* afford to re-arrange their business so that they *could* pay in advance if they wanted to - does it not make sense for them to arrange their business and finances such that they become their own credit insurer? Then - apart from they have a big pile of cash they can't do anything with - their credit insurance suddenly starts costing them zero, but more importantly their credit insurer can't suddenly run off into the night screaming.

[Mark Leaver]

Credit Insurance

I have worked for a company brokering credit insurance (finance) to companies who are selling their goods on credit (i.e. the suppliers who supplied Comet their goods on credit) and I can tell you it is a damned complex process. As the article says, it's usually the banks who are supplying the credit to the companies who are selling the goods that push for credit insurance. After all the banks want to get their money in the end. This indemnifies the guys supplying the goods on tick against a company going bust suddenly and leaving them holding a note for hundreds of thousands of pounds (dollars, euros, yuan) and having no way of recovering that money which in turn could send the supplier bust.

A lot of times, the underwriters we were dealing with would supply a limit lower than the amount asked for, which would give an indicator that there was something wrong with the guys you were selling your stuff to. This would in turn dictate your policy terms for selling to them... meaning that if you had in the past given them pretty good payment required terms (60-90 days or even 120 days), you might suddenly change your terms with them to 30-60 days or even tell them that they cant have the goods unless they pay up front for them.

If you ever want to know information about a company and any problems they might be having, check out Dun and Bradstreet (www.dnb.com) and get a credit report of them.

[The Godfather]

Re: Credit Insurance

Banks secure the risk they take...trade suppliers often cannot.

[John Smith 19]

Seems dull, but as Comet found out can kill your business.

Funny as I though *most* Comet business was to *individuals*, much of it on credit. So Comet *always* gets paid.

Two things to keep in mind.

It is highly unlikely that one credit limit will cover *all* your debtors.

If they start to run late in payments you must *escalate* the recovery actions. If not the business can (literally) bleed out of cash.

But on the "1 rule for them, 1 rule for us" consider Dell, who *demand* 90 days credit from their *suppliers*.

BTW the UK has the second *slowest* payers of business bill in Europe. Only the Italians do "manyana" better.

[briesmith]

Point Missed

The insurance policy change that killed Comet and will probably do for PC World/DSG and others in the future wasn't so much the loss of trading credit but the loss of the income from the sale of extended warranties.

A ramp similar to PPI and Mortgage Indemnity scams, extended warranties were the store's profit. They made very little margin if anything on the goods themselves.

Once that little racket was ended the game was up.

[Anonymous Coward]

I knew GEC were going bust when

one of my customers in GEC wanted to repeat a paid-for exercise we'd done previously. My employers told me I couldn't do it unless GEC paid in advance, They didn't.

Whatever did happen to GEC anyway?

[shrdlu]

GEC

What happened to GEC is that Lord Weinstock left. Maggie then allowed a law to be passed enabling creditors to demand interest on late payments. As this was the core of GEC's business model they collapsed. GEC relied on government contracts that it would complete and get paid for before it paid any of its subcontractors. A memorable event in my career was putting the whole of the GEC group on stop-shipment until they biked over a cheque. They did so immediately. I was hoping that their buyer would demand to escalate it to my management. The European General Manager was standing by my left shoulder when I made the phone call.

[Anonymous Coward]

"the whole of the GEC group on stop-shipment until they biked over a cheque"

Respect is most definitely due sir.

I could tell a few tales about parts of GEC I dealt with (one of the more interesting in the dying months was someone, clearly trying a private venture startup in company time, asking "can you do xyz for us without my boss being able to find out?").

There's a book to be written about this stuff somewhere, or maybe someone already did.

There may also have been other contributing factors to the collapse besides the two you mention - Weinstock's multi-decade investment strike being just one (investment in people and R&D was an unnecessary expense judging by Weinstock's actions).

Meanwhile companies like Tesco are now masters of the art of blackmailing employees AND suppliers AND paying late.

[Anonymous Coward]

Re: Whatever happened to GEC

In one line: Some bloke called Simpson took over when Weinstock retired; decided that Weinstock's style of slow, steady and profitable (but not wildly so) was not for him; so sold the defence bits to BAE Systems and tried to turn Marconi into an internet boom "dot com" where the cash was bound to roll in. He failed so miserably that I don't think he ever got a job anywhere else. (Not that he needed to since he made sure he got plenty of up-front bonus, the shifty git.)