5 Strategies for Thriving in an Era of Higher Bankruptcies

Global Insolvency Outlook

The trend is unmistakable: trading environments, both globally and in the majority of advanced economies, are becoming more vulnerable. And it is a pattern that businesses ignore at their peril.

Around the world, the average increase in business insolvencies accelerated from +23% in 2022 to +29% in 2023, according to the Global Insolvency Outlook from Allianz Trade. And there is no let-up – at least for now: the early months of 2024 show the pace of bankruptcies rising to above pre-pandemic levels.

The causal factors are complex but to give the figures a historical context: they represent the greatest rise in business failures since 2009 when the global financial crisis was still in full flow and annual bankruptcy rates were rising at +33%.

What is surprising about the current momentum is its reach. In three out of four countries worldwide, the number of business insolvencies jumped in 2023, with most recording a double-digit increase. The main exceptions: emerging markets, principally the BRICS countries. When those are rolled into the calculation, the global insolvency index shows an increase of +7% year-on-year, up from +1% in 2022.

The picture in North America was particularly notable, with the US recording a surge of +47%. Though less turbulent, Western Europe remained a key contributor to the global trend, with an uplift of +15%.

Descent to a lower peak

How that is playing out in 2024 should be a consideration for businesses everywhere – but especially for those trading in or with certain countries: the largest increases in bankruptcies are likely to be in the Netherlands, where the prediction is of a +31% year-on-year rise, the US (28%) and Spain (+28%). At a global level, our economists see an acceleration in business insolvencies of +9% this year, with business environments in four out of five countries experiencing insolvencies increasing +12% on average.

There are many interconnected factors that will determine how the business climate develops over the year, not least of all the fact that voters in countries that account for 60% of global GNP are choosing their next governments – and their economic agendas. Successfully navigating such uncertainties will involve some prudent choices for business leaders.

Looking forward, companies can expect a slightly more stable picture in 2025. The Allianz Trade Global Insolvency Index points to the majority of countries experiencing a fall in the rate of insolvencies – an average decrease of -9% worldwide – even if the rate of bankruptcies will remain at a historically high level.

Recipe for a rise in insolvencies

The economic signals for 2024 that suggest you should be strengthening your business’s defenses:

The impact of slower global demand in the US, Europe and some emerging markets, GDP growth will be either absent or in low single digits. Prolonged weak demand will result in increased competition, leading to reduced pricing power and declines in revenue growth. That is likely to make trading less profitable at a time of still-high operating costs, with little relief expected from lower energy prices or moderated labor costs.

Coming on the back of the economic shocks of recent years, business uncertainty will be further influenced by general elections around the world, including those in countries that account for 60% of global GDP. That situation will add a layer of complexity and risk to operations by making it harder to accurately forecast and make business plans.  

Although inflation rates are expected to fall back during 2024 in many economies, cautious central banks are unlikely to cut interest rates significantly in the short term. With the cost of financing remaining relatively high, companies will find it challenging to sustain their capability to absorb the costs of higher-rate borrowing and mitigate the pressure on overall profitability. At the same time, the limited availability of financing will put some of the more exposed sectors and firms at risk.

The post-pandemic acceleration in business creation is likely to push up the ‘natural’ rise in business insolvencies during 2024. In Europe, for example, new business registration was +14% higher in 2021-2023 compared to 2016-2019, and the 2024 business environment will be the first true test of their resilience, especially in countries that saw the birth of most new businesses, notably France (+47%), the Netherlands (+28%) and Belgium (+14%).

The sectors and firms most exposed to the risks of a prolonged period of weaker demand and high financing costs are those that rely on discretionary spend (manufacturing/retail of non-essential goods, hospitality, leisure activities) and those in labor-intensive industries (construction, transportation, hospitality, healthcare, and some areas of business services). That could be particularly acute for construction and real estate in Europe, where the continuation of the most recent pace would mean that in 2024 around 16,000 firms going bust in France, 7,000 in the UK, 4,000 in Germany and 2,000 in Italy.

Until there is some relief from insolvency acceleration (expected in 2025), enterprises need to adopt proactive measures to fortify their defenses and mitigate potential risks. By diversifying their markets, practicing sound financial risk management, embracing trade credit insurance, and adopting agile business practices, they can effectively shield themselves against the worst effects of insolvencies, ensuring resilience in an uncertain economic climate.

Five ways you can safeguard your businesses amid growing insolvencies

The specter of multi-year increases in insolvencies poses substantial risks to businesses in many sectors. To navigate these turbulent times, companies can turn to a variety of strategic measures to fortify their defenses. Here are five strategies businesses can adapt to mitigate the impacts of rising insolvencies:

1. Diversify your client bases and supply chains Businesses can act to diversify their client bases and supply chains so they reduce dependency on a single market or supplier. By expanding their pool of customers and putting in place sourcing arrangement with multiple suppliers, companies can mitigate the adverse effects of insolvencies within specific sectors or regions. Although not always an option for companies with highly specialized supply chains, this strategic maneuver can enhance resilience against disruptions and bolsters the overall stability of a business’s ecosystem.

2. Strengthening financial risk management,  Robust financial risk management practices are paramount in safeguarding businesses against the fallout from insolvencies. Enterprises can intensify their efforts to assess, monitor and mitigate financial risks through prudent measures such as enhanced due diligence on potential partners, rigorous credit evaluations and the establishment of stringent credit policies. By adopting a proactive approach to risk management, businesses can preemptively identify vulnerabilities among key suppliers and implement appropriate measures to protect their trading networks and interests.

3. Protect your business with trade credit insurance: In response to a rising threat from insolvencies, many businesses rely on trade credit insurance as a vital safeguard against potential losses arising from non-payment or default by customers. Trade credit insurance provides your businesses with financial protection and peace of mind by indemnifying you against losses incurred due to insolvency or protracted default. By using the services of an insurer such as Allianz Trade, your company will have access to deep insight into the creditworthiness of your suppliers worldwide, expertise in areas such as risk and cash flow management, and an assurance that you will be paid in full if buyers go under. That safeguards the business’s cash flow, maintains its liquidity, and sustains uninterrupted operations, even in the face of widespread insolvencies.

Such a solution is even more important when the business wants to offer purchase financing to their online customers (through a B2B Buy Now Pay Later arrangement). Allianz Trade’s E-Commerce Credit Insurance solution checks the credit status of online customers in real-time as they arrive at checkout and decides if they should be offered net terms and at what level.

4. Adopt agile business practices faced with worrying insolvency picture, businesses can embrace agility as a core tenet of their operational strategy. Although not a financial guarantee, fostering a culture of flexibility, adaptability and innovation can help companies swiftly respond to changing market dynamics and mitigate the impacts of insolvencies on their operations. That might involve leasing rather than buying plant and machinery or breaking down projects into discrete jobs so the impact of any partner or customer bankruptcy is minimized and the business can pivot quickly to alternative opportunities.

5. Make sure of sureties When issuing new contracts, it is more important than ever that your business knows that those awarded the work can deliver – or else have the capability in place to pay you appropriate compensation. Surety bonds and guarantees offer that protection. But in many cases, your contracting partner would be better sourcing them from an insurance company rather than a bank, as that approach provides your company with two main advantages. A surety bond issued by an insurance company won’t tap into your contractor’s credit line with their bank, and so doesn’t impact their liquidity; and global insurance companies that back surety bonds typically have higher credit rating, than many banks, adding further security to your guarantee.

Discover more about how trade credit insurance and  surety bonds can allow your business to trade with confidence.