Our current global economic environment isn’t pretty: soaring inflation, supply chain disruption, rising interest rates and declining consumer spending have made for a risky cocktail.

Companies in large part depend on credit from banks for their working capital. Without it, they may be unable to pay employees or suppliers, or purchase inventory. But rising interest rates on that debt will be their biggest headwind and for some, the developing economic downturn could signal the end.

As Director of Risk Underwriting at Allianz Trade in North America, here are my insights into how a business can navigate the changing landscape.

As the situation develops, we are likely to see banks and lending institutions approach riskier business profiles – especially those falling in the SME category – with more caution. These businesses, in turn, could turn to non-traditional, and increasingly popular, financing options to access credit, such as buy-now-pay-later.  

Irrespective of the economic context, accounts receivable credit – issued via terms of sale – remains a reliable option for businesses of all sizes. Essentially a promise to pay, this form of credit is relatively unimpacted by interest rates.

What we do see in tough economic times, though, is companies maximizing their cash conversion cycle (CCC) by reducing their terms of sale. The CCC is, in basic terms, the period of time between the date of sale and the date that payment is received. The longer the cycle is, the longer it takes to realize the money owed for a product or service and, crucially, to repurpose those funds. Businesses must assess whether they can risk issuing 180-day payment terms, or if they need to tighten up the cycle and reduce them to 60, or even 30 days.

Ultimately, corporate credit is not just an efficient use of capital; it’s fundamental to global economic operations. With a solid business strategy in place, it can be a vital tool to support companies through crisis – and beyond. In practice, this means businesses should exercise caution, concentrate on their core competencies, avoid taking significant risks and, critically, know both their customers and their suppliers.

This is where trade credit insurers, such as Allianz Trade, play a valuable role. As a trusted partner, we can advise companies on the risks associated with both our clients’ buyers, and their sellers. And we can help them decide if – and how – they should amend their terms of sale, as well as what the associated risks are if they do. We offer global and local expertise acquired through years of experience to help companies limit their risk and weather the economic storm. And in volatile environments like we’re seeing today, this can make the difference between survival or bust.

Stephen Georgetti

VPII, Regional Director of Infromation & Grading,
Allianz Trade in North America