How Trade Credit Insurance Can Help Manufactures Thrive in the New Normal
The COVID-19 pandemic made 2020 an incredibly challenging year for the manufacturing sector. Though the impact has been profound and sustaining, many within the sector are now out of the fight or flight mode and able to be far less reactive than they were at the beginning of the crisis.
In fact, those that have shown resilience are in a position to take advantage of the opportunities that the new normal presents - liquidity, however, will need to play a key role in achieving success.
Production level maintenance
Though it was an intense crisis, the recovery has been relatively fast. In fact, the manufacturing sector in Africa is almost back at the same productivity levels seen pre-COVID-19. This is particularly true for those manufacturing current-day necessities like IT products, home appliances, packaging for food, and even fertilisers.
COVID-19 has proved particularly harmful to those with pre-existing conditions; the same sentiment can also be held for businesses. Those manufacturing businesses that were experiencing challenges before the pandemic found it harder to weather the storm, with banks and lenders unable to support their recovery. This has contracted the sector, making it a more competitive space for those stable and strong manufacturing companies that were able to survive.
The increased demand that this creates also helps with recovery — especially as manufacturers are broadening the regions and customer bases they service. Those with exposure to Europe and the UK now more than ever appreciate the need to have a diversified global approach. Many in the region are looking to Africa and Asia for new opportunities and an expanded customer base.
Fundamentally, every crisis creates one fundamental opportunity, and that is to learn hard lessons. For manufacturers surviving the pandemic, that has been not to rely on one source of supply chain. It is essential to create a more diversified framework, where there is access to alternative suppliers of raw materials. This also encourages competition, which leads to better prices.
How Trade Credit insurance can help?
With these opportunities to build resilience in mind, there are a number of ways for manufacturing businesses to protect themselves against liquidity risks:
- Stable Cash-flow
Manufacturing companies are renowned for having long cash conversion cycles. For a manufacturing company to manage its liquidity, they need to ensure they are investing time and money in the right trade opportunities. Knowledge of how much customers are willing to pay for products and the length of time they will take to pay is paramount and needs to be factored into product prices. This will help with timing cashflows.
Manufacturing companies have two key concerns: will they be paid, and how do they meet their liquidity requirements. The stress of the first can be eased with trade credit insurance; having a trade credit insurance could also help with managing cashflow timings by removing some of the uncertainty. For the second manufacturers can use a factoring solution. Manufacturers can turn to the bank to provide structured protection as well as liquidity.
- Managing debt obligation
Manufacturing companies are asset-heavy, due to significant machinery needs. These assets are usually obtained using notes of credit. Also, they may have bank guarantees in favour of their suppliers. Manufacturers could turn to surety products and insurance bonds in place of bank guarantees, these options would allow them to free up their capital that is sitting with the banks. This in turn could allow banks to offer more debt facility, which would be beneficial to manufacturing companies in the current climate.
- Stable supply chain
Manufacturing companies also have obligation to the suppliers. Structuring a supply chain finance facility could be beneficial for managing liquidity in this area. By utilising an insurer and a banking or financing partner, the facility could manage the manufacturing company’s credentials and making direct payments to suppliers. On top of this, it could provide cash-flow for expected payments, helping the manufacturer maintain liquidity.
By focusing on a solution-driven approach to the three key liquidity risk areas of receivables, supply, and debt obligations, a strong and robust financial system can be created for a manufacturing company that will allow it to seize opportunities and build a thrive future.