Thanks to a massive injection of state-funded liquidity into global markets, many companies have not had to deal as much as usual with late payments and insolvencies recently. But this situation will not last. With governments expected to begin phasing out state support this year, the challenge now facing CEOs and CFOs is how to spot high-risk customers and suppliers to protect their company against insolvencies. Identifying insolvency risks in a supply chain is critical, but what exactly do high-risk, Covid-sensitive customer and supplier companies look like and are they easy to spot?
When it comes to hunting for financial distress and insolvency warning signs among customers, you should ask the following questions about the companies you do business with. These points form a sliding scale which increases in severity. Generally speaking, the more questions answered with ‘yes’, the greater a company’s risk level.
  • Is your customer taking longer to settle invoices?
  • Have they asked to renegotiate contracts?
  • Is there a trend toward late deliveries… or even disputes?
  • Are funders refusing to support your customer during renewal facilities?
  • Have they attempted to switch to alternative funding sources?
  • Are their stocks performing badly? Are they being shorted?
  • Have the credit default swaps (CDS) prices increased?
  • Has your customer recently lost a major client/supplier?
  • Are they attracting negative press coverage?
  • Have any C-suite members resigned unexpectedly?
  • Is your customer unable to pay employee salaries/social charges?
  • Have they appointed restructuring advisors?

In the current economic environment visibility and awareness of risk is paramount. The situation is complex, so you need to have 360-degree visibility of what is happening around you and your partners. This means keeping a close eye on all of the factors that could lead to business insolvency and incorporating them into your trade relationship-management strategy. Achieving such a granular level of insight is not easy, especially for embattled SMEs who may find their resources stretched to the limit during tough economic times.

If you have trade credit insurance, remain in close contact with your insurer. More than information providers, they have skin in the game, so it is in their interests to give you the right levels of understanding to effectively manage the risk within your supply chains and recover potential bad debts. If you do not have trade credit insurance, we highly recommend you get coverage right away.

It would be a simplification to think a trade credit insurance begins and ends with premiums and pay-outs. The industry focus is increasingly on predictive prevention. In other words, an effective trade credit insurer will do everything within their power to identify high-risk trading partners and break the chain of potential insolvencies before it can start. When companies are faced with a chain reaction of insolvencies throughout global supply chains, data of this granularity will continue to provide the confidence to trade, and be paid, no matter what.

We offer you eight steps to protect your business from the domino effect and improve supply chain management:

How should businesses protect themselves so they can maximise their trade credit offering without exposing themselves to unacceptable risk?

1. Avoid concentrating your supply chain in one region or country

When it comes to insolvency protection, where you trade can be just as important as who you trade with. You can protect your supply chains by risk assessing where your customers are based and the markets in which they operate. An obvious step is to improve supply chain management: diversify supply chains so they are not concentrated in one area and there is not an over-dependence on the regions hardest hit by the pandemic.

2. Shorten your supply chains and bulk up lean production methods

Extended supply chains spanning multiple partners and countries have been particularly fragile during the pandemic. Other factors such as Brexit and recent trade disputes between the US, China and the EU have also added increased complexity to cross-border trade. Our global survey on Covid-19 disruption of more than 1,000 business leaders across six sectors reveals that 52% are hedging against these kinds of supply chain risks by shortening their supply chains, stockpiling and using trade credit insurance.

3. Benchmark your payment terms against trends in other countries and sectors

Achieving effective payment terms can be a delicate balancing act – build in too much time and you increase risk, demand payment too soon and you lose competitiveness. Our free Mind Your Receivables online tool enables you to quickly and effectively compare your repayment terms with trends in different countries and sectors so you can achieve the perfect balance.

4. Pivot your supply chain partnerships towards digitally transformed customers and suppliers

Business models that are still heavily reliant on physical interaction and exchange are among the most at risk of insolvency and the domino effect. Lockdown orders and social distancing have hit offline businesses hardest, reducing and even halting demand in many cases. Businesses and sectors that have been able to shift activity online, however, have reduced the negative effects of lockdown.

5. Ensure your supply contracts give you maximum customer insolvency protection

Faced with the prospect of a normalisation of customer insolvencies, you should ensure your contracts limit potential losses as much as possible. This includes inserting contract clauses that ensure that you, as supplier, legally retain ownership of goods until all customer payments are fully settled. For this to be effective, businesses should regularly audit and maintain a full inventory of all stock held by their customers, which has not yet been fully paid for.

6. Set up effective credit limits and cash buffers

Setting an upper threshold on trade credit is an effective way to limit your financial exposure and increase insolvency risk protection. Your first step, however, should be to speak to your trade credit insurer, if you have one. They will be able to leverage their proprietary risk data to ensure your credit limits are pitched at just the right level. Another strategy is to ensure you always have a cash buffer for use in the event of an emergency, such as a payment default.

7. Make full use of all your trade credit insurer’s services

Trade credit insurance has much more to offer than indemnifying you against bad debt. Market-leading insurers, such as Allianz Trade, are also experts in debt recovery and debt collection, with the skills and experience needed to maintain an effective, on-going dialogue with debtors and their legal teams, no matter which country or jurisdiction they operate in. Trade credit insurers can also give businesses access to comprehensive insight about the constantly changing risk environment.

8. How to deal with insolvency risk if the worst scenario becomes a reality

The speed with which a business reacts to customer insolvency is key. The ideal scenario is to identify and act on warning signs before your customer becomes insolvent. But if this isn’t possible, the second best option is to be at the front of the queue of creditors. Experience tells us that the businesses with the best insight, the best understanding of insolvency procedures and the quickest reactions recover the greatest proportion of owed funds. Not many companies have these resources and that is why it makes great sense to partner with a leading trade credit insurer who can take the stress out of payment recovery. They will investigate a non-payment on your behalf and indemnify you for the insured amount.