Mitigating inflation risks in B2B Credit Management

While inflation may have been worse in the past, for the majority of the current workforce, these levels of inflation are unprecedented. Forecasts for global inflation now sit firmly at 6% for 2022, pushed up by rising energy and supply chain disruptions. The consequences are yet to be fully felt but must be carefully managed.

Inflation will add new and evolving risks that credit management and finance teams in B2B companies need to be prepared for. Although there may be little that companies can do to control the prices they pay, understanding how it will affect their cash flow, profitability, and funding options will be key. Furthermore, a clear picture of the downstream risks within their customer base will help credit teams support and protect the company.

Most of us have already seen the direct effects of inflation. Many businesses have already had to raise wages and salaries, driving up their fixed cost structure. While the prices set by your suppliers are increasing alongside the larger invoices you’re billing your own customers, your working capital needs may grow substantially.

As such, it’s critical to be sure that your cash position and borrowing capacity are in line with your higher accounts payable balances, even if you’re still buying the same volume of goods. The higher sales will drive up the accounts receivable balances and force credit teams to make a choice. They must weigh the approval of higher credit lines against lost business which may occur if they don’t extend additional credit to their customers.  These higher balances magnify the  credit risk  and impact of a default.

Moreover, disrupted supply chains are causing delayed payments, so companies are seeing longer cash conversion cycles. This additional pressure on the liquidity and flexibility of the business must be addressed early to ensure working capital funding and contingency plans are in place before they’re needed.

These are the direct impacts of inflation on a business. The consequences of inflation on your customers and the end-user should be considered carefully as well. As rising costs are passed down the supply chain, there may be a transaction in which the customer won’t accept the higher price. This could force your company to take on the added cost and face thinner margins. If it occurs further down the supply chain, it can reduce your customer’s profitability, potentially leading to  bad debt .

The other obvious consequence of inflation is higher interest rates and the subsequent slowing of the economy. Higher interest rates increase the cost of capital and reduce the availability of funding. This can have a significant impact on certain businesses that need to borrow a lot, whether due to weaker cash flow or high capital expenditure needs.

High interest rates—pushed up by elevated inflation—drive up debt-related interest expenses, and they also reduce the projects’ ROI and growth potential. For companies in this position, rising rates will be painful. The companies that had managed previously with burdensome debt loads may be unable to make payments to vendors and banks. When the time comes to refinance debt, they may struggle and face the  risk of insolvency.

Beyond business customers, the slowing economy will also impact demand from consumers. And this is an international issue – within our globalized economy when inflation occurs, it tends to hit everywhere in the world in different and unpredictable ways. Understanding how your customers (and their customers) will be affected by these headwinds can be challenging.

When an economy undergoes dramatic shifts and becomes destabilized by inflation, the risk of B2B customers defaulting on payments increases. Against such a backdrop, it is imperative that companies make informed decisions about who they are selling to, and that they fully understand the impact of inflation on their customers. Knowing your customers is key to avoiding situations where a customer can’t pay. Trade credit insurance provides the in-depth knowledge of your customers to make better-informed decisions about who to sell to. From there, the insurance protects against unforeseen bad debt losses.

In parallel, when trying to borrow more,  trade credit insurance  on receivables helps businesses get access to additional funding. Credit insurance can allow companies the financial flexibility they need to cover their working capital and growth needs. This support helps them endure and thrive in these volatile times of high inflation and elevated uncertainty.