How economic factors impact trade credit risks and opportunities

Business director talking to colleague looking at a laptop

The economic environment has created tough conditions for UK businesses in recent years. Heightened inflation, high-interest rates, and a lack of consumer confidence have all taken their toll on trade.

The 2023 UK Business Risk Report found that financial uncertainty was the top risk facing businesses, with just over one-third of UK business leaders citing it as a significant cause of concern. Meanwhile, statistics from The Insolvency Service show that company insolvencies in England and Wales recently hit a 30-year high.

As businesses grapple with uncertainty, they may look towards trade credit insurance, which can provide an attractive option for growing securely and mitigating credit risk when faced with economic disruption.

Countering high inflation and interest rates

High inflation has affected many businesses in the UK. Consumer spending has slowed as the cost of goods and services has increased.

According to the Bank of England, three factors have caused high inflation in the UK:

The COVID-19 pandemic: Many businesses suffered considerable financial losses and operational disruption during the pandemic, and recovery efforts continue to strain businesses.
The Russia-Ukraine conflict: The economic side effects of the conflict include higher energy and food prices.
Worker shortage: Many people did not return to work after the pandemic. The shortage of workers has pushed up wages, which has led to some businesses increasing the prices of their goods and services. Other potential reasons for the worker shortage include Brexit, health complications, and older people retiring early.

Inflation steadily eased in 2023, from its peak at 11.1% in October 2022; however, the Bank of England remains cautious regarding expectations of when interest rates may return to around 2%. While the Bank of England can influence inflation to some degree by raising interest rates, other factors, such as geopolitical risks, are outside its control.

The current environment of higher inflation and borrowing costs has added to businesses’ financial pressures. When interest rates are low, businesses may be more willing to extend credit to customers, as the cost of borrowing is lower. Conversely, higher interest rates can increase the cost of credit and make businesses more cautious.

Trade credit insurance could provide the required support organisations need to grow securely. Insuring the amount of income still waiting to be paid through outstanding invoices can help you obtain improved terms from funders, which could strengthen your business in high-inflation environments.

Late and non-payment risks

Slower global economic growth, high energy prices, inflation, and soaring interest rates have made delayed payments or non-payment for goods and services more likely.

Late payments can cost your business time and money, but there are measures you can take to reduce this risk. These include:

Ensuring your credit management system is up to date. Credit checks on new customers, ongoing checks, and examination of company accounts should be carried out where required.
Negotiating clear payment terms and reminders and set credit limits. This gives customers ample time to meet their financial obligations.
Motivating customers with incentives, such as discounts, when payment deadlines are met.
Considering how trade credit insurance can cover both the losses faced by businesses when outstanding invoices go unpaid and the solicitors’ fees incurred when pursuing bad debt.

Creating supply chain resilience

Supply challenges have been exacerbated by the difficult economic landscape, putting unprecedented pressures on businesses. Most businesses in supply chains are reliant on financially healthy suppliers and customers to keep their own business on an even keel. The domino effect created if these companies go under can have ramifications for numerous suppliers.

Trade credit insurance can help businesses be more resilient by providing specific cover for agreements and commerce with suppliers. It can also provide cover for financial losses when customers are unable to pay for purchases.

By approaching the issue of supply chain management strategically, firms can be proactive in protecting themselves from supplier insolvencies. This may include:

Undertaking due diligence with companies in the supply chain to ensure they are legitimate and financially healthy. Choosing suppliers of a similar size, with similar values and visions, means your outlook is more likely to be aligned.
Ensuring you have diversification and flexibility. More than one supplier gives you alternatives should problems occur.
Fostering relationships. Working with suppliers and customers can lead to new business opportunities, allowing firms to overcome challenges, expand into new areas, and identify potential problems.

Suppliers may not always be keen to share business concerns, but there are warning signs to look out for that can indicate potential problems ahead. Indications a company might be heading towards insolvency may include:

Reduced communication.
A deterioration in service.
Inconsistent stock levels.

If you suspect that your supplier may be facing difficulties, you can take action to establish the seriousness of the situation and protect your business. For instance, you can engage with your suppliers to try to find a solution, consider renegotiating terms, and seek legal action if necessary.

Protecting your business with trade credit insurance

Given this backdrop, it’s no surprise that businesses are investing in trade credit insurance, which can provide an attractive form of protection against credit risk and an opportunity to access funding. In the 2023 UK Business Risk Report, 46% of business leaders said that insurance coverage has helped alleviate one of their main concerns, financial uncertainty, in the previous year.

Trade credit offers numerous distinct benefits, particularly in the areas of risk mitigation, growth, and enhancing working capital.

Businesses can be protected against default for customers trading on credit terms reducing the risk of invoice non-payment. In addition, it can enhance a company’s credit management, with insights into potential customers' credit ratings being just one of the valuable benefits you could receive from your provider.

Trade credit insurance can protect the business and support growth. It helps facilitate business expansion by enabling companies to safely offer more competitive credit terms to new and existing customers.

Insured parties feel more confident exploring new markets or expanding their customer base without fear of significant financial loss.

If financing is needed, trade credit insurance can reduce the risk for financial backers. This could result in the offer of improved financing terms.

Finally, trade credit insurance also enhances working capital, improving cash flow by protecting against late or non-payment and ensuring more predictable income streams.

Looking ahead to new opportunities

Despite the tough economic conditions, there are reasons for optimism regarding the resilience of UK businesses and the renewed focus and confidence among their leaders. According to the 2023 UK Business Report, business leaders are optimistic about the future, with 50% anticipating increased productivity and 46% expecting an improvement in profitability in 2024.

Businesses can plan, grow, and adapt to challenges and opportunities through a successful risk management strategy that incorporates forecast planning, protects cash flow, and defends against supply chain challenges and cyber and environmental risks.

Explore more about trade credit.

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How economic factors impact trade credit risks and opportunities