Credit Insurance Blog
Commercial Mortality Is As Certain As Human Mortality
by Joe Ketzner
Commercial Mortality is Inevitable- Invest in Trade Credit Insurance
Contemplation of which company has been in existance the longest?
Research suggests that a Japanese construction company dating back to the 6th century is the oldest continuously operating commercial business in existence. The research conducted by folks much more intellectually gifted than me, develops the list of the Top 10 oldest companies in the world made up of businesses associated with construction, Inn & restaurant, winery, foundry, plantation, firearms, publishing, and candle manufacturing. This research was unable to provide any clue as to how many businesses were formed, failed, and liquidated since the 6th century. I suspect we can agree that the number has many zeroes behind it.
What is the point?
These century old institutions are anomalies, rare exceptions to the natural life cycle of a business enterprise. Businesses are born from an idea or need. They begin to grow and require nourishment (capital and markets), structure, and management. As they mature, growth becomes more challenged as competition appears, and operational deficiencies are exposed. Market needs change, pressuring financial performance, which ultimately plateaus. As the period of growth and maturity ends, the inevitable period of decline sets in. This leads to its ultimate demise and commercial mortality.
Not all businesses go through the orderly born-mature-die life cycle as many are affected by extraordinary events accelerating their demise. The years 2019 and 2020 witnessed several events which reflected the full spectrum of causes leading to bankruptcy and/or liquidation of some high-profile names. Long before the global pandemic and government reaction: Pacific Gas & Electric, Thomas Cook, Bumble Bee Tuna, Purdue Pharma and Dean Foods provided a vast array of causes which accelerated the decline of these once high performing companies.
The Covid-19 pandemic taking global root in early 2020 affected businesses with weakened financial health consistent with its impact on humans with compromised health issues. The weakest succumb first. While Covid-19 will likely be listed as the cause of death, the underlining reasons will align with past business failures. Unfortunately, even financially strong, well managed, and well capitalized businesses will ultimately be weakened by government lock down and intervention at an unprecedented level.
Pre-existing are the main cause of business failures
Commercial mortality and specifically Chapter XI filings tend to follow debt management issues having little margin for error should there be an economic disruption. Chesapeake Energy (fracking), California Resources (oil & natural gas), Frontier Communication (telecom), Hertz (car rental), JCPenney (retail), McDermott International (construction), and NMC Healthcare (hospital operations) represent a small yet diverse group of recent failures. Most of these enterprises were dealing with pre-existing conditions long before Covid-19 complicated matters.
For those who might suggest that many of these unfortunate events could have and should have been avoided, and that size and market position provide insulation. I would suggest that many famous commercial deaths dictate otherwise. Over the course of the past several decades iconic names like Lehman Bros ($691b), Washington Mutual ($328b), WorldCom ($104b), GM ($91b), CIT Group ($80b), and Enron ($65b) experienced commercial mortality associated with usual operational issues. Poor management, heavy debt load, limited financial flexibility, creative accounting, etc. are pre-existing conditions are often difficult to detect before their failure. Too big to fail was proven wrong. These failures trigger a tsunami of other casualties. Beyond the immediate impact of these losses to the unsecured creditors, the real harsh impact will occur as a result of the ripple effect as it worked its way back through the supply chain. Challenging to predict and plan for the ultimate impact…
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Who should care and what to do about it?
In the realm of commercial mortality, these mega-events steal headlines, however it’s the aggregate losses associated with the thousands of companies which fail each year that keep us awake at night. Commercial mortality, regardless of cause has the same effect; a business has died and left a trail of unpaid bills impairing the supply chains’ working capital, earnings and capital. In fact, research suggests that beyond poor management, the most likely cause of a company’s bankruptcy is the default on payments for goods and services provided to its customer. Better known as the ripple effect….
Most of us carry life insurance. Typically, this is to ensure that when we die, financial protection of our family and benefactors will continue once the income we provide ends. We acknowledge we are all going to die, and the same is true of a commercial enterprise.
As it relates to the exposure associated with accounts receivables, what preparations have been taken to ensure that your business, its stakeholders, its cash flow, its capital and its earning have been protected?
The #1 reason provided from those who already utilizing trade credit insurance; avoiding a catastrophic bad debt loss event. While there are many other reasons to contemplate investing in a trade credit insurance policy, this one is basic. It defines trade credit insurance.
For all the “it could never happen to me”, “we’ll see it coming and avoid it before it happens”, “we know our customers”, “our sector is solid”, and the plethora of other retorts I have heard over the past 50 years, it will happen to you as well.
Beyond the restaurant sector, the food industry has historically been considered one of the most stable sectors in the world. However recent failures associated with Bumble Bee Tuna, Dean Foods, as well as names such as Houlihan’s, Borden Dairy, Dean & DeLuca, and Earth Fair, have created a long list of unsecured creditors. No industry sector is immune. All businesses will eventually die.
Two obvious certainties when defining risk- business is typically conducted on open unsecured credit, and all businesses will eventually die. Commercial mortality is inevitable.
Risk can be mitigated and transferred through various instruments; trade credit insurance is one of the most comprehensive and cost-effective investments a business can make. The proverbial life insurance policy for business.
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