For businesses, insolvency risk can be a serious concern. Insolvency is a complex and often misunderstood term, but it essentially means that a business is unable to pay its debts. For business owners and managers, understanding insolvency and how to prevent it is crucial for ensuring the long-term success of their organizations. In this article, we will explore what insolvency risk is, what it means for a business, and how to protect your business from it.

What is insolvency risk?

Insolvency risk refers to the possibility that a business will become insolvent, or unable to pay its debts in a defined period of time. Insolvency can occur for a variety of reasons, including poor financial management, cash flow management, market changes, unexpected events and even the failure of clients. When a business becomes insolvent, it may be forced to declare bankruptcy, liquidate its assets, or take other measures to address its financial obligations.

After two years of decline, Allianz Trade Economic Research expect global business insolvencies to rise in 2023 and catch up with their pre-pandemic levels.

Understanding the meaning and the impact of insolvency risk on a business

Insolvency is a concrete risk to all companies, especially considering the current economic global context: inflation, supply chain disruption, rising interest rates, mixed to political uncertainties and conflicts can put the best-run companies at insolvency risk.

Insolvency risk is not only the consequence of bad management: the global economic crisis of 2008 and Covid-19 pandemic have proof that even the best-run companies can face insolvency risk through no fault of their own.

The insolvency of a client, especially if it involves a key customer, can have a severe impact on cash flow: a  large unpaid invoice can compromise the growth of your business or even lead your own company to insolvency.

Strategies for protecting your business from insolvency risk

There are several strategies that businesses can use to protect themselves from insolvency risk. Two of the most effective are credit risk management and trade credit insurance.

Credit risk management involves assessing the creditworthiness of customers and suppliers and managing credit exposure to minimize the risk of bad debt accounts. This can include implementing credit checks, setting credit limits, and monitoring payment behavior. By managing credit risk effectively, businesses can reduce the risk of cash flow insolvency caused by bad debt.

Trade credit insurance is a type of insurance that protects businesses against the risk of non-payment by customers. It covers the risk of insolvency or protracted default, providing businesses with peace of mind that they will be paid for goods or services provided.

Conclusion

Insolvency risk is a significant risk for businesses, and it is essential to understand what it means and how to protect your business from it. By implementing credit risk management and evaluating trade credit insurance, businesses can reduce their exposure to insolvency risk and protect themselves against the financial and legal implications of insolvency.

Don't let insolvency risk mean the end of your business - take steps to protect yourself today.