The insolvency of a client can severely challenge any business. It is crucial for entrepreneurs to be aware of potential scenarios involving corporate insolvencies and know how to act to prevent them, safeguarding cash flows and their business's financial stability.
In this article, we examine the insolvency trends for 2023, strategies for prevention, and tools to secure your business.
Corporate Insolvencies: Allianz Trade forecasts
Allianz Trade has released its Global Insolvency Report and reviewed its forecasts of business insolvencies for 2023 and 2024. After a small rebound in 2022 (+2%), global insolvencies are set to surge by +21% in 2023 and +4% in 2024.
How do we explain this increase, and will it be sufficient to reach pre-pandemic levels soon?
This rise in the number of business insolvencies worldwide can be primarily attributed to the current muddle-through environment. Beyond lower growth, extended pressure on profitability, weaker cash buffers, and tighter-for-longer financial conditions are testing the resilience of the most fragile companies.
This includes those with the least pricing power (e.g., specialized retail such as textiles, household appliances, and some services including restaurants); those most exposed to a higher wage bill, such as retail, transportation, and construction; and those most exposed to rising interest repayment costs (construction, durable goods).
Insolvent clients and non-payments: preventing the risk
In light of this scenario, the real challenge for businesses in the coming months will be identifying high-risk clients and suppliers.
In the case of an insolvent client, it is clear that without adequate protection, the business conducting sales on credit will face significant financial losses. The negative impacts caused by financially unstable suppliers must also be considered, such as lost payments and deposits, as well as disruptions in the production and distribution chain that may lead to further insolvencies.
Identifying potential insolvency risks along the supply chain is essential, but how can businesses prevent these situations?
Here are our top five tips for preventing client insolvencies:
- Diversify your supply chains
- Carefully evaluate the geographic areas where your clients are located and diversify supply chains so they are not all concentrated in the same area.
- Shorten supply chains
- Supply chains involving a high number of entities and countries have been the hardest hit in recent years. This has led many businesses to consider adopting lean production methods and shortening production chains.
- Include specific clauses in your contracts
In the face of a normalization of client insolvencies, a strategic choice can be to limit potential losses within contracts as much as possible. This can be done by using contractual clauses that ensure legal ownership of goods is maintained until all payments are completed, and by defining credit limits to limit financial exposure.
- Choose a Credit Insurance policy
The most comprehensive and reliable tool for identifying high-risk commercial partners and preventing potential insolvencies before they occur is Trade Credit Insurance.
Businesses using Credit Insurance have a close partnership with their insurer, who has the know-how to provide the correct level of risk information and control throughout the entire supply chain, preventing potential non-payments.
Credit insurance is not limited to indemnifying invoices in exchange for a premium; its focus increasingly revolves around "predictive prevention," based on continuous monitoring of the client portfolio. This activity is conducted using a global, constantly updated database of information.
When businesses face insolvencies along global supply chains, this detailed information offers not only awareness but also certainty of receiving payments regardless of what happens.
As mentioned in our introduction, the rebound in business insolvencies is intensifying for a growing number of countries, after two years of decline, and the ‘normalization’ is still not complete.
Businesses must adapt to the evolving landscape of corporate insolvencies: by staying vigilant and proactive, companies can better protect their financial stability and ensure growth amidst the challenges that lie ahead in 2023 and beyond.