UK businesses are anticipating significant challenges as the combined effects of increases to both National Insurance contributions and the National Minimum Wage create a perfect storm of financial headwinds. These changes - potentially compounded by disruption to global trade if US President Donald Trump presses ahead with tariffs - could spell trouble for many, with more labour-intensive sectors particularly exposed. The consensus is that UK businesses need to buckle-up for increased cash flow risks and an elevated risk of payment defaults.
Predicting the exact trajectory of economic pressures is never easy, but there are proactive steps UK businesses can take to insulate themselves from some of these risks. One obvious route forward is leveraging tools like trade credit insurance, and the business intelligence that often comes with it, to stay informed, limit your exposure, and bolster your financial resilience.
Mounting financial pressure
From April 2025, employers will have to contend with their National Insurance (NI) contribution rate rising from 13.8% to 15%, along with a big drop in the secondary threshold to just £5,000. At the same time, the National Living Wage for workers aged 21 and above will increase by 6.7%, rising to £12.21 per hour. Taken together, these two measures represent an unprecedented rise in payroll costs, adding around £7 billion to annual costs for UK retailers alone, according to figures included in a letter (opens a new window) to Chancellor Rachel Reeves coordinated by the British Retail Consortium.
Small and medium-sized enterprises (SMEs), who account for 99.9% of the business population (opens a new window), are particularly vulnerable. With narrower profit margins and limited financial reserves on which to draw, many SMEs could struggle to absorb the additional costs. Alarmingly, insolvency specialists predict a ‘wave of distress’ through 2025, as rising costs and sustained high interest rates push more firms towards financial collapse (opens a new window).
The domino effect
The consequences of insolvency ripple far beyond the affected businesses themselves. A single company’s failure can disrupt entire supply chains, leaving suppliers with unpaid invoices and shortfalls in anticipated revenue. Sectors like construction, retail and hospitality - already disproportionately impacted by rising costs - look set to be among the hardest hit. In 2024, these sectors accounted for 18% of all UK business insolvencies, according to Allianz (opens a new window).
Even businesses with historically strong payment records are not immune. Recent collapses like that of ISG Group (opens a new window) (with debts of £1bn) and Buckingham Group (opens a new window) (£108m) remind us that we should never assume that any company is simply too big or too well-established to fail. Suppliers caught in the fallout often bear the brunt, especially those who rely on financial data that doesn’t capture real-time risk evolution.
The value of trade credit insurance
In such an uncertain environment, trade credit insurance has a vital role to play in helping businesses mitigate risks. By insuring you against non-payment as a consequence of insolvency or default, it provides a financial safety net. But its value goes way beyond simply providing compensation for unpaid invoices. Trade Credit Insurance providers offer businesses a wealth of real-time intelligence, empowering them to make better informed decisions about who they trade with and on what terms.
Early warnings and proactive adjustments
Insurance providers continuously monitor the financial health of companies they cover, often using data not generally available to the public. Drawing on their analysis of this data, they provide policyholders with early warnings on customers or suppliers showing signs of distress, for example when they see evidence of deteriorating creditworthiness or delayed payments. This insight enables businesses to take appropriate action - by adjusting credit terms, reducing their exposure, or seeking alternative commercial partners - before issues escalate.
For example, insurance providers may reduce credit limits for struggling companies or withdraw coverage altogether for future transactions - based on up-to-date intelligence rather than historical financial data. While such changes can be more than a little inconvenient at the time, they often serve as a critical early warning system, protecting businesses against the cascading effects of customer insolvencies.
Sector-specific vulnerabilities
The challenges posed by rising costs are not evenly distributed. Labour-intensive sectors like hospitality, where payroll typically accounts for a substantial proportion of operating costs, are particularly exposed. The British Beer and Pub Association has suggested that - with 50 pubs in England and Wales already closing their doors each month (opens a new window) the combined effects of rising wages, an increasing tax burden, and elevated energy costs could provide devastating.
Similarly, the retail sector - which has already seen a number of high-profile failures in recent years (for example, Wilko and Paperchase) - is treading a fine line between staying affordable for consumers and remaining sufficiently profitable to stay afloat. Suppliers to these industries need to exercise due caution as the risks of delayed payments and defaults increase.
The statistics paint a troubling picture
The November 2024 figures from the Insolvency Service (opens a new window) indicate that while UK insolvencies fell slightly in October 2024 to 1,747 (down 10% from the previous month), they remain 43% above pre-pandemic levels. Worse still, the UK’s insolvency rate is expected to remain elevated through 2025, with global insolvencies projected to rise 11% over the same period, according to the Allianz (opens a new window). These sobering figures underscore the importance of businesses prioritising proactive risk management.
How trade credit insurance can help you stay well-informed
Trade credit insurance providers are uniquely well positioned to provide businesses with actionable intelligence. By leveraging predictive analytics, they can identify the companies and sectors at heightened risk of insolvency. Their insights are not limited to domestic markets. Many insurance providers have global networks that give them unparalleled visibility into evolving patterns across international supply chains.
Enhanced decision-making
This level of insight can help you make better-informed decisions about extending credit or pursuing new opportunities. For example, if you are a supplier considering a large order from a retailer in a struggling sector, consulting data available from your insurance provider can help you assess the retailer’s financial stability and adjust your terms accordingly.
Breaking the chain
Insurance providers can also help businesses mitigate the domino effect of insolvencies. By identifying and addressing risk concentrations within supply chains, they can empower businesses to diversify their customer base and reduce their reliance on vulnerable sectors. Diversification can make the difference between weathering an economic downturn and succumbing to the turbulence.
The hidden costs of self-insurance
Some businesses, particularly those with strong internal credit controls, may believe they can manage risks without formal insurance. But self-insurance often leaves companies exposed to unforeseen shocks. Recovering unpaid debts can be a costly and time-consuming process, particularly when cross-border legal complexities arise. Trade credit insurers, on the other hand, often provide debt recovery services as part of their offering, saving businesses time and resources.
Building resilience in an unpredictable economy
While no solution can eliminate the risks created by rising costs and insolvencies, trade credit insurance can equip you with the tools you’ll need to navigate these challenges effectively. Credit insurance is a risk transfer mechanism and a cash flow tool – if your customer cannot pay for the services or goods you have delivered to them, the credit insurer becomes liable and must replace the missing cash flow – the lifeblood of every business. By offering a blend of financial protection, real-time intelligence, and risk management support, insurance providers can help businesses maintain cash flow stability and safeguard long-term operations.
Looking ahead
The road ahead will likely remain bumpy, with insolvencies projected (opens a new window) to stay above pre-pandemic levels at least until 2026. Preparation is key. Whether by tightening your credit controls, diversifying your customer base, or leveraging the full benefits of trade credit insurance, taking proactive steps today will leave you better positioned to thrive tomorrow.
In uncertain times like these, staying well informed and responsive is not just best practice — it’s a necessity. Trade credit insurance offers a crucial additional layer of protection, but also something more: the confidence to make bold decisions and seize opportunities, even in the face of adversity.
For further information, please contact the author or visit the Lockton Trade Credit Insurance (opens a new window) page.
