Written by: James Tiarks, Managing Director, Meridian Finance Group
2023 has been a challenging year for many US businesses as they face the combined effects of rising interest rates, geopolitical tensions, inflation, fluctuating currencies, and changing consumer preferences. According to statistics released by the Administrative Office of the U.S. Courts, business bankruptcy filings rose 23.3 percent, from 12,748 to 15,724 in the year ending June 30, 2023.
Looking ahead to 2024 and beyond, many experts predict that the bankruptcy trend will continue as the effects of the Federal Reserve’s rate-hiking campaign and inflationary pressures continue to strain corporate balance sheets. Moody’s suggests that the bankruptcy trend is just getting started with defaults for companies with speculative-grade debt expected to increase to 4.9% by March 2024, up from 2.9% at the end of the first quarter of 2023.
Bankruptcies can have crippling consequences on your business as well as spillover effects on other businesses that are connected to the insolvent ones through trade or financial links.
Trade Credit Insurance
With bankruptcies set to rise, it is important for businesses to monitor their financial health and take proactive measures to avoid or mitigate the risks of bankruptcy. One way that businesses can protect themselves is by purchasing trade credit insurance. Trade credit insurance – also known as accounts receivable insurance – protects businesses when a customer fails to pay (protracted default) or becomes insolvent.
Trade credit insurance has many benefits for businesses that sell goods or services on credit terms. These benefits include:
- Protects from Bad Debt: Protects your accounts receivable when customers fail to pay.
- Extended Payment Terms: Become more competitive with the comfort your shipments are covered.
- Improved Credit Information: Access to key credit risk analysis on existing customers and prospects.
- Enhanced Working Capital: Negotiate better advance rates, and foreign receivables can become eligible collateral.
- Reduce Bad Debt Reserves: Free up capital and manage your AR more efficiently.
- Lower Concentration Risk: Approve orders that might typically exceed credit limits and mitigate lender concerns around customer concentration risk.
By choosing a reputable and experienced credit insurance provider, businesses can benefit from their expertise and analysis and tailor their policies to suit their specific needs. A trade credit insurance policy can pay for itself by giving suppliers the confidence to extend payment terms and the opportunity to keep doing business in the US or abroad, even in difficult economic circumstances.