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Finding business stability in a time of economic uncertainty

In times of economic stability, trade credit between organizations is a saving grace. Buyers such as retailers and manufacturers can purchase raw materials on credit, and execute their business initiatives the moment an opportunity presents itself. On the other side of the table, suppliers can lock down a customer's business and ultimately generate their revenue in the form of accounts receivable.

But in times of economic and political uncertainty, like the one we're living in, trade credit becomes a significant risk for both parties involved. If a buyer becomes insolvent and cannot repay a debt, the supplier will have to eat those losses. At the same time, entire enterprises are constructed on the value they derive from trade credit. Jack Cowley, partner at Trade Risk Group, put it best:

"Trade and trade credit is literally the lifeblood of business in the United States."

If domestic and global suppliers pulled out of the trade credit game, they'd be pulling the rug out from the under their own feet, and for that matter, the global economy's. In other words, risk avoidance simply isn't an option.

Suppliers need to keep playing the game, and they need to play it well. The best way to do that is to manage their trade risk.

Trading on a tightrope
"The market place hasn't had a lot of experience with bad debt in the recent past," Gene Ferraiolo, TRG partner, said in a recent interview. "But there's a tremendous amount of uncertainly about what will happen in the future."

Specifically, Ferraiolo referred to the political and economic changes that are leaving the future of global markets up in the air. Businesses in the U.S., for instance, are figuring out where they stand in the wake of Donald Trump's darkhorse victory. Across the pond, Brexit has upended countless companies' supply chains, and will continue to be a source of uncertainly as trade agreements are renegotiated between the remaining EU members. To cap it all off, economists predict a slowdown in global economic growth within the next 50 years.

"The most resilient buffer against trade risk is trade credit insurance."

In total, these circumstances increase the likelihood of insolvency, according to Ferraiolo. Beyond that, Cowley added that these conditions may encourage businesses to act more conservatively out of wariness, thereby causing many of them to miss critical opportunities for profit and growth.

On a positive note, there are ways to manage this risk. Ferraiolo and Cowley agreed that the most resilient buffer against trade risk is trade credit insurance.

Creating credible credit
Ferraiolo and Cowley contend that by insuring accounts receivable, suppliers have more liberty within their own market, for several key reasons.

  1. Risk mitigation: In the event that a customer becomes insolvent, suppliers won't have to self-insure their loss. This is the primary benefit of trade credit insurance.
  2. Market credibility: "Buyers have great comfort in knowing that their supplier is in a financially stable position to deliver goods," Cowley said. "Part of that financial stability is the use of trade credit insurance, knowing that the supplier will not fail or go out of business because they were not paid by another company."
  3. Increased sales opportunities: As Cowley worded it, "If I'm willing to sell a customer $100,000 worth of merchandise at my own risk, what would I be willing to sell if I could insure it?" The safety net of a trade insurance policy could give businesses the security they need to pursue new opportunities.
  4. Flexibility: "There is a tremendous amount of customization for these policies," Ferraiolo said. "A company can insure all of their accounts, one account, and anything in between the two." Cowley added: "The product is for them. It's designed for how they do business, not how the insurance company wants them to do business."

Ferraiolo added that there's a backend benefit in the event that insolvency occurs, which is freedom from having to waste management time and effort to chase after salvage – the underwriter will do that for the insured.

The only challenge that Cowley sees in the trade credit insurance market is the competition for coverage. Now more than ever, businesses are scrambling to insure their accounts receivable, which makes it difficult to actually secure coverage, and to make sure that an underwritten plan achieves what the organization set out to achieve. 

But Cowley noted that this is hardly a problem as long as businesses choose to seek insurance through a broker, and ideally, one that will help them keep their plan current.

"These generally aren't policies where the insured buys it and sticks in a drawer until they have a problem," Ferraiolo added. "They're very ongoing, service-intensive policies because the nature of the insured's business is always evolving."

As previously mentioned, it's not just businesses that change, but also the economic conditions in which they operate. Under such uncertain circumstances, the best you can do is protect the assets that matter to your business.