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Know your customers – it has never been more important

on Wednesday, 22 July 2020. Posted in Financial management, Finance

As the lockdown restrictions ease, the Government has given more businesses the green light to start operating again, provided they can observe the necessary social distancing and infection control measures.

Know your customers – it has never been more important

As the lockdown restrictions ease, the Government has given more businesses the green light to start operating again, provided they can observe the necessary social distancing and infection control measures. 

The latest survey by the ONS on the impact of the coronavirus reported that 25% of responding businesses that had paused trading expect to restart within the next four weeks and 30% intend to restart trading in more than four weeks, especially in the manufacturing, construction and wholesale and retail sectors. 

And yet, the same report revealed that 42% of responding businesses had less than six months of cash reserves (this rose to 57% of those who had paused trading during the lockdown). So, while the acute stage of the crisis may be over in the UK, the financial shock has clearly affected the stability of many businesses and left some close to the brink. In addition to its previous interventions, the Government has now introduced legislation to protect otherwise viable companies threatened with insolvency by giving them the “breathing space and tools required to maximise their chance of survival”.  It covers measures such as the temporary suspension of wrongful trading provisions and permanent reforms such as formal moratoriums on winding-up petitions so eligible companies can pursue a rescue plan.    

This is good news but it will still be difficult for companies to trade on credit terms with confidence when there is a risk that a customer is not in a position to pay. Credit insurance is part of the answer and a new State-backed temporary reinsurance scheme will mean your business can continue to access trade credit insurance cover for losses arising from customer insolvency. 

At the same time, it’s never been more important for you to protect your own bottom line by assessing companies’ credit risk profile. Here are three key questions to consider if you want to get a broader understanding of your customer and decide whether they represent a golden opportunity or risky business:

  1. Where are they based?

The economic and political context in which a company operates exerts a positive or negative influence on its financial health and risk of payment default. The pandemic has been a devastating blow but some countries are proving more resilient than others and it is not necessarily the ‘mature’ economies.

Globally, Coface predict a sharp rise of 25% in corporate insolvencies and expect the major world economies apart from China and India to fall into recession. Our latest country risk assessment map shows average business default risk in more than 160 countries, based on macroeconomic and payment data. More than 70 countries have been downgraded, including the United States, South Africa, Saudi Arabia, Malaysia and Germany. But the map also shows some countries where the risk has not deteriorated (such as Denmark, Japan or Senegal), perhaps because there have been successful measures to contain the spread of the virus or limit the financial shock. 

It therefore makes sense to research the impact of the pandemic in your customers’ markets including the current status of restrictions on trading and movement; whether the rate of infection is still rising; levels of social and political unrest. 

  1. What trade sector are they in?

The pandemic has affected both supply (production capacity, disrupted supply chains) and demand (limited opportunities for consumption, impoverished households) across a range of sectors but the impact has not been felt equally. 

Coface’s Q2 sector risk assessments show the default risk in 13 sectors across six geographic regions.  There have been no upgrades but the pharmaceutical and agri-food industries and services such as telecoms are in a relatively stronger position. At the other extreme, services linked to tourism, leisure, transport and specialist retail (clothing, electronics) and automotive manufacturing have been hardest hit. 

The pandemic has also highlighted the risk of relying on complex global supply chains, particularly in sectors such as automotive, textiles and electronics. As factories reopen, many multinationals are likely to want to reduce their exposure to supply chain disruption by diversifying suppliers. This could present new opportunities for providers of raw materials or intermediate products. 

  1. What is their current financial position? 

Of course, companies can be profitable trading partners, even if they operate in high-risk countries or trade sectors. Equally, long-established names can still be undone by a financial shock or critical shortage of cash. 

It is therefore essential to carry out due diligence on every prospect and run regular financial health checks on existing customers so that you do not go blindly into any credit transaction. In the current volatile climate, things can change rapidly so don’t rely on trade references or last year’s statutory accounts alone. 

To protect your bottom line, run a credit assessment based on the company’s recent trading history and obtain external insight to dig deeper into their financial position. Coface can provide up-to-date information on circa 80 million companies worldwide, ranging from a Snapshot of a company’s creditworthiness and payment behaviour to a Full Report, incorporating late payment and claims data and analysis from our underwriters. 

This article was brought to you by Coface – a world leading credit insurer

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