8 ways to ensure insolvency
protection against the Covid-19 domino effect

With an upcoming normalisation in insolvencies post-phasing out of state assistance mechanisms, 2021 is shaping up to be a risky year for companies that rely on trade credit to sell their goods and services. How then should businesses protect themselves so they can maximise their trade credit offering without exposing themselves to unacceptable risk?
We offer you eight steps to protect your business from the domino effect and improve supply chain management:

1. Avoid concentrating your supply chain in one region or country

When it comes to insolvency protection, where you trade can be just as important as who you trade with. You can protect your supply chains by risk assessing where your customers are based and the markets in which they operate. An obvious step is to improve supply chain management: diversify supply chains so they are not concentrated in one area and there is not an over-dependence on the regions hardest hit by the pandemic.

2. Shorten your supply chains and bulk up lean production methods

Extended supply chains spanning multiple partners and countries have been particularly fragile during the pandemic. Other factors such as Brexit and recent trade disputes between the US, China and the EU have also added increased complexity to cross-border trade. Our global survey on Covid-19 disruption of more than 1,000 business leaders across six sectors reveals that 52% are hedging against these kinds of supply chain risks by shortening their supply chains, stockpiling and using trade credit insurance.

3. Benchmark your payment terms against trends in other countries and sectors

Achieving effective payment terms can be a delicate balancing act – build in too much time and you increase risk, demand payment too soon and you lose competitiveness. Our free Mind Your Receivables online tool enables you to quickly and effectively compare your repayment terms with trends in different countries and sectors so you can achieve the perfect balance.

4. Pivot your supply chain partnerships towards digitally transformed customers and suppliers

Business models that are still heavily reliant on physical interaction and exchange are among the most at risk of insolvency and the domino effect. Lockdown orders and social distancing have hit offline businesses hardest, reducing and even halting demand in many cases. Businesses and sectors that have been able to shift activity online, however, have reduced the negative effects of lockdown.

5. Ensure your supply contracts give you maximum customer insolvency protection

Faced with the prospect of a normalisation of customer insolvencies, you should ensure your contracts limit potential losses as much as possible. This includes inserting contract clauses that ensure that you, as supplier, legally retain ownership of goods until all customer payments are fully settled. For this to be effective, businesses should regularly audit and maintain a full inventory of all stock held by their customers, which has not yet been fully paid for.

6. Set up effective credit limits and cash buffers

Setting an upper threshold on trade credit is an effective way to limit your financial exposure and increase insolvency risk protection. Your first step, however, should be to speak to your trade credit insurer, if you have one. They will be able to leverage their proprietary risk data to ensure your credit limits are pitched at just the right level. Another strategy is to ensure you always have a cash buffer for use in the event of an emergency, such as a payment default.

7. Make full use of all your trade credit insurer’s services

Trade credit insurance has much more to offer than indemnifying you against bad debt. Market-leading insurers, such as Euler Hermes, are also experts in debt recovery and debt collection, with the skills and experience needed to maintain an effective, on-going dialogue with debtors and their legal teams, no matter which country or jurisdiction they operate in. Trade credit insurers can also give businesses access to comprehensive insight about the constantly changing risk environment.

8. How to deal with insolvency risk if the worst scenario becomes a reality

The speed with which a business reacts to customer insolvency is key. The ideal scenario is to identify and act on warning signs before your customer becomes insolvent. But if this isn’t possible, the second best option is to be at the front of the queue of creditors. Experience tells us that the businesses with the best insight, the best understanding of insolvency procedures and the quickest reactions recover the greatest proportion of owed funds. Not many companies have these resources and that is why it makes great sense to partner with a leading trade credit insurer who can take the stress out of payment recovery. They will investigate a non-payment on your behalf and indemnify you for the insured amount.

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