Trade Credit Insurance: Supporting the B2B Economy as Recession Looms

by James Daly

A looming recession has forced many B2B companies to reevaluate their strategy. Among other tactics to build resilience, one essential course of action often overlooked is investing in trade credit insurance (TCI).

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With all eyes on the question if the U.S. has in fact entered into a recession, B2B companies are already bracing for impact. Among other tactics to build resilience, organizations are taking a more structured approach to growth, closing supply and demand gaps, and investing in sustainability to insulate and bolster their operations. However, one essential course of action often overlooked is investing in trade credit insurance (TCI), a critical tool for businesses to mitigate risk, especially in times of economic downturn.  

For B2B companies, it’s important to understand what TCI is and how it sustains commerce. TCI is used to protect a company’s accounts receivable against customers unable to pay due to insolvency, non-payment or political risk. In fact, TCI provides significant liquidity to the B2B economy and protects $300 billion in transactions a year in the U.S. When companies sell on open credit, they are essentially issuing an unsecured short-term loan to their customers. Trade credit insurance provides a valuable level of protection. Not to mention, it can also be leveraged within financial institutions to offer businesses increased cash flow and funding solutions. 

The ability to understand credit risk in international markets is especially challenging due to legal and language barriers, which is why nearly 80% of all global trade is supported by some sort of trade finance or credit insurance covering transactions on open account terms. Without trade credit in place, companies are less likely to execute trade because it’s risky or they often don’t have the finances to do so.  

With that background in mind, I outline below the key information, trends, and applications that companies should consider to make smarter and more strategic decisions in relation to TCI. 

Lessons learned from previous downturns 

Understanding the implications of past economic slowdowns provides companies with a foundation to make informed decisions about their TCI strategy. During previous downturns, we’ve seen consumers tighten their belts, and by extension, disposable income purchasing tapers off. Larger items, such as houses, cars, and furniture, often see the greatest reduction in spending. When we begin to notice that trend, the peripheral industries supplying what’s needed for those items become impacted. Right now, we are seeing a slowdown of consumption, coupled with the challenge of supply chains; and as consumption reduces, we begin to see more layoffs. 

Additionally, as the Fed continues to increase interest rates, access to liquidity typically becomes difficult, and consequently, trade customers can have difficulty with payments. To address this issue with our clients, we first understand our clients’ customers' financial health and the impact of increasing interest rates on their liquidity. We then use this information to assess how a company will be able to trade through a slowdown. From there, we will advise on whether the company is wise to continue with the client, or if they need to pull back. Ultimately, this decision-making process about trading should be rooted in a strong understanding of when cash is getting tight and payments are getting slow, which is an indicator to future non-payment. 

How businesses can proactively prepare 

For many businesses, cash is king. Companies should have strong terms and conditions in supply contracts and ensure they are managing their accounts receivable on an on-time basis. If it’s coming up to due, rather than waiting for the due date, it’s important to be proactive in managing cash and days outstanding -- tasks with which, more often than not, small businesses aren’t as disciplined. Lastly, if small and mid-size companies have any concerns about their customers, they should look to change the method of payment, reduce their credit terms, or ask for cash on delivery or prepay.  

Looking ahead  

Since the beginning of the 2000s, we’ve experienced a slew of economic downturns -- from the dot com recession and the financial crisis to the COVID-19 pandemic; and now, we have the current global slowdown, along with record-breaking inflation.  

The past few years of economic volatility have reinforced the importance of being agile, flexible, and resilient to ensure the prosperity of our lives and businesses. Understanding the benefits of utilizing trade credit insurance and incorporating it into one’s overall risk management efforts, affords companies the protection they need, especially in times of great uncertainty.  

James Daly is CEO Americas, Allianz Trade North America