Credit, Collections & Insolvency News
From the onset of the pandemic, economists around the world predicted an unprecedented fallout with global recession and a sudden surge in insolvencies. However, as we rode through the storm of the pandemic, the wave of insolvencies failed to materialise.
After knowing the inevitable link between economic decline and business failures all too well from the 2008-9 recession, worldwide governments took action. Fiscal support measures were introduced and anti-bankruptcy schemes were designed to keep businesses afloat. As a result, we saw a decline in UK insolvencies during 2020 with rates as much as 27% lower year on year. While support schemes were evidently effective in preventing insolvencies, it’s fair to say they created an artificial trading environment. But now, as the economy rebounds, these support schemes are being gradually withdrawn. The question now is ‘what happens next’?
Atradius’ new Insolvency Forecast reports UK business failures will begin to rise in H2 of 2021. Overall, UK insolvencies are expected to tick up by 7% this year. However, Atradius economists expect the spike to fully hit in 2022 with a forecast 70% rise in insolvencies year on year. Of course, we must remember this surge is based on artificially-low figures so for a more accurate reflection, we need to compare the 2022 rate with a pre-pandemic baseline. This analysis reveals UK insolvencies will be cumulatively 33% higher in 2022 than they were in 2019 – one of the highest rates in the world.
There are three forces shaping the upward trajectory of insolvencies. First is the delayed onset of bankruptcies that would have otherwise occurred in 2020 and have effectively just been propped up. Second, is the swing back towards ‘normal’ pre-pandemic levels triggered by the phasing out of support schemes. Finally, there is the elasticity of insolvencies to GDP changes which has been effectively suspended throughout the pandemic to date. The raft of expected insolvencies will also include the fall of so-called ‘zombie’ firms whose financial situation is too weak to survive once economic circumstances return to normal. These zombie firms may be able to buy themselves time by running down their cash but Atradius expects them to materialise into bankruptcies within four quarters of fiscal support ending.
All of us knew the spike of insolvencies was on the horizon but this does not make its arrival any easier to bear, particularly as the trading environment has already been so fraught throughout the duration of the pandemic. To weather the storm, the most important tool at a business’ disposal is information. As a trade credit insurer, information underpins the entire underwriting process and a wide range of sources is used. One key source is management accounts and forecasts alongside credit checks. However, with the force of change being so fast-paced in recent years, these are no longer reliable on their own as they can quickly become outdated. Instead, this information is supplemented by monitoring payment practices of buyers around the world which forms part of Atradius’ extensive business intelligence on millions of firms. Alongside regular communication and an open-door policy to buyers, this allows Atradius to build up an accurate, real-time picture of a buyer’s ability to pay.
The same principle applies for any business; make sure your information is kept up to date and can be relied upon. Make it your business to know your buyers inside out from their payment practices to wider market trends which could impact their cashflow and financial health. In uncertain times, credit management strategies must be absolutely bullet proof. Insolvency is indiscriminate with the ability to take down any business no matter how big the brand or how long they’ve been trading. This means you can’t be reticent about the risk just because your buyer is a household name or they are a long-standing customer.
Once you have the right, up-to-date information, act on it. If there are any red flags, question them. This could be a simple trend of payments failing to be made on time, buyers permanently taking advantage of full credit lines or asking to prolong overdue bills, changing banks or even offering bills of exchange in lieu of payment. Being over cautious is far more welcome than the alternative.
When it comes to getting paid, send invoice reminders ahead of due dates and, if you can, incentivise early payment. If payment is late, chase it. If it remains unpaid, send a final warning letter and turn the debt over to a collection agency. Just this action alone can spur payment and, if not, you have the backing of a specialised team with nothing to pay if they do not successfully collect the debt.
In today’s uncertain economy and with insolvencies ahead, businesses must be prepared for any eventuality. Only with the right measures in place, the flexibility to adapt and a proactive approach can businesses seize new opportunities and can be ready for rebound.
