Uncertainty reigns as we begin the new year. States nationwide and countries on every continent are struggling to flatten the growth curve of the pandemic. The human costs of the coronavirus continue to rise while we await widespread vaccination and hope for eventual herd immunity.
However long that takes, economic recovery will take longer. The comeback, when it happens, may be gradual or it may be steep . . . but the new normal is not likely to be a return to the old normal.
What can your company do to survive in the meantime? Perhaps even to flourish? How can you help your customers achieve the same? And, by extension, contribute to the revival of business activity in our country and globally? You can start by understanding the essential role of trade credit.
Credit Demand in COVID-Time
Demand for trade credit has evolved since last March and will not return to pre-2020 norms in 2021. Maybe not ever. Your customers have less access to working capital from banks and other financing sources, so they’re turning to suppliers like you for higher credit limits and longer payment terms. Plus your customers are getting paid slower by their customers, sourcing materials through broken supply chains, operating remotely or with social distancing, and encountering ongoing change and uncertainty . . . all while trying to hang in there long enough to participate in the eventual recovery.
Beyond reacting to your customers’ demands for credit, you’ve got your own proactive reasons for offering competitive payment terms in COVID-time: to book orders where opportunities still exist, produce/purchase more efficient quantities, strengthen your throughput and supply chains, get your distributors to stock more inventory, stage your products nearer to end-users, and—like your customers—maintain market share for when the economy comes roaring (or at least crawling) back.
Challenges Posed By Credit
When you extend more credit and longer terms, however, what happens if you don’t get paid? Nonpayment risks have always existed, but the downsides have become more acute now because of more customers’ bankruptcies, cash flow and working capital issues, excess leverage, financial inflexibility, quarantines/lockdowns, uncertain supply chains, and other problems either caused by the pandemic. Or masked by the pandemic (i.e., don’t assume every payment problem is COVID-related).
Larger credit lines and longer payment terms also impact your company’s working capital. 90 days is the new net 30. On top of that, your customers may be paying slower. Unless you have a lot of cash in reserve, how do you keep filling new orders, paying your labor and material expenses, etc.?
As you’ve begun extending more credit, accounts receivable have become more difficult to finance. Banks and other lenders face challenges to monetizing A/R that present with longer terms, slow payments, risk concentrations, etc. . . . especially amid widespread uncertainty and during a recession.
How to Manage Credit Now
1. Carefully evaluate your customers’ creditworthiness, then extend them competitive but reasonable credit terms.
2. Obtain a credit insurance policy to protect your company’s accounts receivable against nonpayment risks.
3. If you need more working capital, monetize your insured receivables with financing from a bank or other lender.
Sources of Credit Information
It may not be easy—or even commercially viable—to reevaluate the creditworthiness of all your existing customers, but to the extent you can do so it’s important to take a hard look again now.
Sources of useful credit information include trade references from other suppliers (the best, of course, being your own ledger experience), year-end financial statements (hopefully available earlier in 2021 than they were last year), interim operating results (at least quarterly), credit bureau reports (beware “coronavirus credit score” algorithms; nobody can predict outcomes yet), industry creditor groups, online info/data/articles, virtual site visits, video dialogues with your customers, etc.
Trade Credit Insurance
Trade credit insurance protects accounts receivable against virtually all nonpayment risks. If a customer covered under a policy defaults, and the debt can’t be collected, the policyholder can file a claim and get indemnified.
Buying a policy now will enable you to keep selling in this uncertain new normal, grow your business with more competitive terms, increase the profitability of your sales, and enhance your borrowing capacity (by designating your bank/lender as your policy’s assignee or loss payee).
All of your company’s insurable sales can be covered under one policy. A credit limit may be underwritten for each of your customers or, if you qualify, your policy will insure the credit decisions you make yourself based on your own experience.
Alternatively you can apply for a receivables insurance policy covering only your largest customers. Or you can be even more selective, as long as the sales you want to insure represent a reasonable spread of risk. Policies covering a single customer are less common, but may be feasible in some cases for a very creditworthy debtor.
Premiums are based on the terms you extend, the spread of risk, and your company’s experience. The cost is low, typically a fraction of a percent of your covered sales volume. Whether or not you pass this incremental expense to your customers, the price is insignificant compared to the business opportunities engendered by extending competitive credit terms while protecting your assets.
Meridian has specialized in brokering trade credit insurance for more than 25 years. We work with every insurance company in the market that writes these kinds of policies. Beyond negotiating the most effective terms at the lowest cost, we provide comprehensive technical support for every policy we sell . . . including in the event of claims.