Our past research has identified three leading indicators that can help detect corporate distress four years before a bankruptcy: profitability, capitalization and interest coverage. Applying these criteria to close to 525,000 SMEs, we find that European SMEs are more exposed to insolvency risk than large companies are. 7% of total SMEs in Germany, 13% in France and 15% in the UK are still at risk of insolvency in the next four years. Without state support, the share of fragile SMEs would have been much higher and fragile SMEs would have been more likely to transform into zombies and become insolvent faster.
Automotive, transport equipment, services, retail, construction and energy appear the most exposed. By looking at SMEs at the sector level, we see many discrepancies within countries and sectors in different countries. The top three sectors with the highest share of fragile SMEs in Germany are automotive suppliers, transport equipment and services, with automotive manufacturers not very far In France, automotive suppliers, transport equipment and energy are on top of the list, mainly due to deteriorating profitability and capitalization. In the UK, it is mainly energy, automotive suppliers, construction and retail.
Sales are usually pretty straightforward. Once the order has been filled, the sale may seem as if it is complete. Nevertheless, on the back end, managing payments can be tricky. Failing to manage collection and protect receivables can have serious consequences on your cash flow and your ability to grow your business. Consider this: if you have a customer that defaults on a debt of EUR 100K, and your net margin is 5%, you will need to generate additional revenues of EUR 2 million to make up for the lost cash flow. Taking the time to draw up a solid credit management strategy can help these companies seize more opportunities.
The main priorities of SMEs in almost any market are growth and obtaining funds. Unfortunately, an overwhelming majority of SMEs are not structuring their internal procedures to manage and protect their receivables, which are a key asset on a balance sheet. Weak management of account receivables, delays of payments and bad debts are all issues that affect the risk profile of a company. SMEs could improve their overall risk profile by investing in qualitative financial reporting in general and credit management specifically.
Trade credit is becoming a crucial business tool for growth and sustaining relationships, especially for competitive market segments in which suppliers have limited advantage on their customers. However, mismanaged trade credit can cause payment delays or defaults that result in devastating consequences for SMEs. In recent years, we have seen many insolvencies triggered by the default of an important customer. This results in a domino effect that affects different levels of the supply chain and could have been avoided (or been less severe) through sound credit management.
Remember, a sale is not a sale until it is paid for! And to make sure your goods and services are paid in due time, that you have visibility and protect your cash flow, you need to carefully consider your credit management process, no matter the size of your company. One supportive tool that can help companies with limited resources assess and mitigate risk is a trade credit insurance. At Euler Hermes, we not only help our clients transfer risk and reduce or prevent loss. We also provide guidelines to help companies to set and structure credit management systems, so they can continue to safely trade and grow their business.
Protecting your company has never been so important than now. Very often bad payments and insolvencies lead to a snowball effect.
A trade credit insurance protects your business against the risks of defaults of payment and insolvencies of your customers. You can look towards a prosperous future:

We monitor the financial health of your customers

We take care of the collection of your unpaid invoices

And we compensate you when your customers don’t pay

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