Credit Insurance Blog

The Mask For Businesses During COVID19
by Joe Ketzner

plain mask for businesses during tough times

The "mask" for businesses during COVID19

While the world debates the value and usefulness of a mask to stem the transmission of the Covid-19 virus, a comparable debate regarding the usefulness of trade credit insurance as a viable financial tool gains new focus.

I typically avoid any introduction of politics into business affairs as a general position. However, as it relates to the utilization of masks to reduce the number of future cases of Covid-19 transmission, I suggest that it can’t hurt and it most likely will help. Therefore, let’s use them until we have the situation under control.

What does this have to do with the utilization of trade credit insurance?

Business mortality is as certain as human mortality. Generally, those businesses who take care of their financial health live longer than those who chose a different path. Having managed through the last 6 recessions as the chief underwriter for the world’s largest trade credit insurer, I have a firsthand view of what is referred to as “a pre-existing condition” within the realm of business mortality. Trade credit insurance is like the “mask”, as it helps protect a business from being infected by others.

The most serious of these pre-existing conditions is debt and the financial ability to raise fresh capital when forced to adapt to changing economic realities. If we analyze the plethora of corporate insolvencies (and trade defaults) over the past year, there is a very strong correlation with their ability to manage debt and/or obtain fresh capital support. The “mask” as it relates to those effectively utilizing trade credit through the monitoring services of the trade credit companies, provided the insurer with advance knowledge of who likely is suffering with these pre-existing ills.

Weak and sick companies existed before Covid-19 and the government’s reaction to seriously disrupt normal trade. They also existed in 2008-09 when the housing bubble burst and many financial institutions became seriously undercapitalized. Companies carrying heavy debt loads were also exposed in 2000-01 as the glamour of the LBO fad reach its culmination. Same with the S&L crisis, the commercial real estate collapse of the early 80’s, not to mention two oil embargoes of the 70’s.

Covid-19 is simply another event, clearly at a more extreme level, which triggered an increase in defaults and insolvencies. Like any of these earlier events, it affects the weak companies first and works its way inwards toward the relatively healthier businesses. Debt, debt management and financial flexibility were the pre-existing conditions which caused the first wave of defaults and insolvency.

Trade credit insurance cannot cure Covid-19 or the impact it will have on many weak companies. Additionally, the downstream negative impact has not fully run its course at this stage as it relates to commercial defaults and insolvencies. There is more to come. However, those businesses who have effectively utilized trade credit insurance have been wearing their “mask” long before this virus hit. Credit insurance helps healthy businesses remain that way, a preventative effort to protect itself against events which cannot be predicted or controlled.

Even more important, credit insurance helps these businesses understand the downstream risk associated with their customers (and suppliers). The resources employed by the main trade credit insurers are significant as is their ability to effectively track large portfolios of companies and their trends. Naturally, many companies may be deemed uninsurable as their pre-existing conditions take on new significance as the broader economic situation deteriorates. This enhances the value of trade credit insurance. The ultimate objective is to avoid avoidable defaults and insolvencies to minimize the negative financial impact on the seller’s cash flow, earnings and capital.

Beyond the function of paying claims on indemnified losses under a trade credit insurance policy, these carriers help with the debt recovery and insolvency management of these events. In addition to monitoring existing customers within the context of the prevailing economic cycle, they will also guide the seller to healthier customers moving forward.

Every economic downturn is followed by an upturn, at least that has been true for the past 200 years. However, the risks associated with the rebound remain as businesses that are highly leveraged or thinly capitalized continue to have a high incidence of default. Many companies simply grow too fast with inadequate capital to fund their growth. The “mask”, “trade credit insurance” remains one of the single best tools to help mitigate risks and foster healthy growth.

2020 will go down as a unique year for a host of reasons. However, from a business perspective, Covid-19 will simply be viewed as one more catalyst which triggered economic uncertainty. From a one-dimensional perspective of risk management, trade credit insurance remains a simple and cost-effective solution. Similarly, to the “mask”, investigating trade credit insurance’s value and benefits; it can’t hurt, and it will most likely help.

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