How Can Businesses Blunt the Impact of Bad Debt during the Pandemic?
April 6, 2020
It’s no secret that the COVID-19 crisis has caused a massive disruption to our lives. Travel bans, border restriction, mandatory business closures, and orders to shelter-in-place are just some of the measures designed to “flatten the curve.”
Business and consumer demand for goods and services has changed dramatically, and suppliers are either stretching to their limits or sitting idle. Many businesses forced to close or idle are worrying about survival and taking opportunities to delay or ignore payable obligations.
In the best of times, demand is relatively predictable, supply is finely tuned, and receivables risks are well understood. Under these conditions, businesses can manage most risks effectively. Offering goods and services on a delayed payment schedule is not uncommon. This practice, known as “trade credit,” allows companies to remain competitive by offering clients attractive payment terms and immediate service when the cost of doing business upfront is too high. But in the worst of times, trade credit can cause a cash flow catastrophe. That’s because the ability to settle the debt is entirely dependent on the buyer’s ability to pay for the goods.
Unfortunately, with Accounts Receivable (AR) representing, on average, 40% of a company’s assets, failing to collect trade credit debt as planned can cause serious damage to a balance sheet. A default by one business can create a domino effect that affects the whole industry, prompting a wave of insolvencies. SMEs are particularly vulnerable. Now, more than ever, it is critical for businesses to protect their cash flow and recover lost revenue wherever possible.
How is trade credit affected by COVID-19?
Here are some examples of how the COVID-19 pandemic and continued economic volatility can affect industry sectors that use trade credit extensively:
Many technology companies rely heavily on external financing from banks and other investors. To secure financing, however, the company must be able to show that there is a demand for the product. Under good economic conditions, trade credit terms may have been implemented to capitalize on growth opportunities and gain clients. But when the risk of client default abounds, the trade credit terms may make it difficult for companies to obtain loans.
Advanced Manufacturing is often international. Your supply chain, distribution chain, and client network is heavily dependent on factors like economic and political stability. And because many of your orders are likely placed in advance—to account for manufacturing speed—a client unexpectedly defaulting on payment and hampering your cash flow can have implications for your supply chain as well.
What if the staffing firm’s client goes bankrupt and cannot pay the staffing firm the fees owing to the independent contractors that have been on assignment? The independent contractors will still submit their invoice to your staffing firm for payment and you may have a cash flow problem because you were not paid by your client who went bankrupt.
Can anything reduce your risk of trade credit nonpayment during this time?
Normally, diligent vetting of new clients and continuous credit monitoring of existing clients can help reduce the risk of trade credit non-payment. But in simpler circumstances, it’s still likely that your Accounts Receivable team is too busy to carry out this time-consuming task. Besides, most of your clients are likely private companies, meaning that you have little to no insight into their real financial situation. And now, in the midst of the COVID-19 crisis, even clients who have an excellent credit history may be facing tremendous financial hardship.
Trade Credit Insurance can help. It will protect your cash flow by insuring some or all of a customer’s bad debt. Trade Credit Insurance will help you:
Manage Cash Flow
If a client defaults on their payment, access your Trade Credit Insurance Policy and receive payment immediately (up to your policy limit). You can also access collection services through your policy.
Obtain Better Credit
Due to the crisis, many businesses are looking for additional credit from their banks. Banks normally loan amounts that represent about 70-80% of the Accounts Receivable. But Trade Credit Insurance can enhance your borrowing power and encourage banks to loan you up to 90% of your Accounts Receivable.
Monitor Your Clients’ Credit
Once you obtain your Trade Credit Insurance, you can rest easy knowing your insurance company monitors your clients’ credit 24/7. If there is a concern, you’ll be the first to know.
Reduce Concentration Risk
Cover all of your accounts, or just your largest or highest-risk accounts, to mitigate the exposure associated with high-value clients defaulting on payments.
Check a prospect’s score before you sign them using your insurance portal. Then, you can offer profitable clients even more attractive payment terms.
Account for Global Volatility
Be resilient in the face of international consumer demand, political upheaval, and economic change—like the ripple effect of the COVID-19 pandemic—which can affect a customer’s ability to pay invoices.
How can you access Trade Credit Insurance?
Your PROLINK team wants to do its best to support you during these challenging times. We can help you plan and protect while you focus on managing your people, your clients, and business. And we can leverage our relationships with eight different trade credit insurers to help you obtain the best terms possible by comparing and contrasting the various options available.
For more information, connect with PROLINK. If you have questions or concerns about your business, your continuity planning, or your insurance, we are only a call or an email away.
PROLINK’s blog posts are general in nature. They do not take into account your personal objectives or financial situation and are not a substitute for professional advice. The specific terms of your policy will always apply. We bear no responsibility for the accuracy, legality, or timeliness of any external content.