Asos’ suppliers are cutting ties with the beleaguered online retailer after credit insurers withdrew cover, according to reports.
The Times reported that insurers started to cut cover over concerns about the group’s falling profits.
Credit insurance is a key cog in the retail supply chain, and the removal or scaling back of it can often signify a lack of confidence in the company which can have huge ramifications.
What is credit insurance?
Credit insurance exists to protect suppliers from buyers and ensures the former will be paid even if the latter goes under.
When times are tough, like they are at Asos, insurers will cut back their offer to avoid forking out the premiums themselves.
Suppliers will often demand buyers pay upfront for their goods rather than providing a line of credit too if they believe the retailer will have difficulty making payments later down the line.
Why is it important?
Credit insurance is important because it allows retailers to hold stock from suppliers while deferring payment for a later date.
They “really grease the wheels to make supply chains work and payments smooth,” according to Neil Wilson, an analyst at markets.com.
“Suppliers can deliver and then wait for payment, which is a good system for retailers, so they don’t need to pay upfront for everything.”
Losing credit insurance can, in some cases, lead to empty shelves (or warehouses in Asos' case), which can have disastrous implications.
In 2017, Toys R Us had its credit insurance cut which ultimately led to its collapse.