Anyone with a pulse can get credit these days. A look at the astronomical foreclosure rates on U.S. homes is a good indicator that some folks have overextended themselves, and it doesn't stop there.
Many businesses also fall into the "in-too-deep" financial category. Your customers could have a bad-credit rap sheet that could stymie your operations by stopping incoming cash that feeds your bottom line.
Indeed, according to the Euler Hermes ACI Business Failures Index, the economic downturn that began in 2007 will increase risks for companies and higher bad debts, leading to a sharp increase in the number of U.S. business bankruptcies this year. Euler Hermes ACI is a provider of trade credit insurance.
The Business Failures Index includes a revised 2007 outlook, which now forecasts a 51% increase in U.S. business bankruptcies for the year. This follows a spectacular but one-off reduction in business failures in 2006, when the number of corporate insolvencies dropped by 50% due to a change in U.S. bankruptcy legislation.
Daniel North, chief economist for Euler Hermes ACI, says the three most serious issues facing U.S. businesses right now are: the effects of increased energy, raw material, and labor costs; the effects of monetary policy tightening by the Federal Reserve in 2004-2006; and the "decimated" housing market and its effects on consumers and businesses.
Euler Hermes is forecasting as many as 30,000 business bankruptcies in 2007.
Globally, the Euler Hermes research department is forecasting a 7% rise in business failures for 2007.
Enter trade credit insurance, a business insurance product that indemnifies a seller against losses from nonpayment of a commercial trade debt. With trade credit insurance in place, the seller/policyholder can be assured that undisputed accounts receivable will be paid, either by the debtor or the trade credit insurer within the terms and conditions of their policy, according to Euler Hermes.
Indeed, several manufacturers have purchased trade credit insurance for myriad reasons.
One of Euler Hermes' customers, a furniture components manufacturer based in Tennessee, bought the insurance to mitigate risk and achieve better banking terms, which allowed the company to offer extended terms in order to be more competitive.
Euler Hermes alerts the furniture manufacturer about troubled companies, enabling the company to reduce its exposure and avoid unexpected losses.
-- Brian Devine, vice president of ProLogistix
Notes Joe Ketzner, executive vice president for Euler Hermes ACI, "As important as it is to know what trade credit insurance is, it is equally important to know what it is not. Trade credit insurance is not a substitute for prudent, thoughtful credit management, and sound credit management practices must be in place before a trade credit insurance policy is bound."