The last few years have brought global upheaval, and as businesses continue to deal with the after-effects of the pandemic the challenge now facing CEOs and CFOs is how to spot high-risk customers and suppliers, in order to protect their company against insolvencies and grow their business.
The risks associated with customer insolvency are clear: without adequate protection, not only do you face potentially devastating financial loss if you sell on credit terms, but there is also the potential for protracted (and costly) legal proceedings.
Meanwhile, the risks related to supplier insolvency may seem less direct, but they can be just as negative – ranging from lost down payments and deposits, to interrupted production and service delivery, which can also lead to business insolvency.
It is vital to identify insolvency risks in your supply chain, but what exactly do high-risk customer and supplier companies look like?
Identifying high-risk customers
Head of Group Credit Underwriting at Allianz Trade, Marine Bochot, explains that identifying high risk customers involves a number of factors. One that has a big hand in the domino effect, is what sector a customer operates in: “Businesses in the hospitality, non-food retail, air industry and automotive sectors now represent a higher risk of insolvency,” Marine explains.
“That’s because borders have been closed, traffic has been minimal, mobility has been stopped, people haven’t been able to meet or move, and they either haven’t been able to consume, or they consume differently – for example online.
“In fact, many businesses in sectors that rely on physical exchange and social interactions for goods and services were hit first by the Covid crisis. So, they have experienced more intensely the need to quickly adapt their operational models and cost structure. Companies that lack this agility are more exposed to business insolvency and a potential domino effect in the supply chain.”
The passenger airline industry is a prime example of this. Those airlines with the agility and flexibility to convert or reinforce part of their traffic from passenger to cargo performed much better during the pandemic.