The Mask For Businesses During COVID19
by Joe Ketzner

The pandemic, the mask, and Trade Credit Insurance

The world continues to debate the value and usefulness of a mask to stem the transmission of the Covid-19 virus even as vaccines and confirmed infections advance herd immunity. A comparable debate regarding the usefulness of trade credit insurance as a viable financial tool gains new focus as the emergence from a global economic downturn continues.

As a rule, I avoid any foray into political opinion with business discussions, please excuse this exception. Regarding the utilization of masks to reduce the spread of Covid-19 transmission or a variant, I suggest that if the central point is- it can’t hurt and it most likely will help- then do it. Let’s use masks until we are reasonably comfortable the virus situation is under control.

You might ask; what does this have to do with the utilization of trade credit insurance?

Business mortality is inevitable

Business mortality is as certain as human mortality. Generally, those businesses who take care of their financial health live longer than those who chose a different path. Having managed through the last 6 recessions as the chief underwriter for the world’s largest trade credit insurer, I had a firsthand view of what is referred to as “a pre-existing condition” within the realm of business mortality. Covid-19 represents the main catalyst to the seventh economic downturn over the past 50 years. Its origin and impact are different than the previous events. However, trade credit insurance acts as the “mask”, as it helps protect a business from being infected.

The most serious of these pre-existing conditions is debt and the lack of ability to raise fresh capital when forced to adapt to changing economic realities. If we analyze the plethora of corporate insolvencies (and trade defaults) over the past year, there is a very strong correlation with their ability to manage debt and/or obtain fresh capital support associated with the disruption to revenue generation. The “mask” as it relates to those effectively utilizing trade credit through the monitoring services of the trading partners, provided the insurer with advance knowledge of who likely is suffering with these financial ills and is most likely to succumb.

Weak and sick companies existed before the pandemic and the resulting government’s reaction which seriously disrupted business activity and trade. Similar conditions also existed in 2008-09 when the housing bubble burst and many financial institutions became seriously undercapitalized. Companies carrying heavy debt loads were also adversely impacted in 2000-01 cycle as the LBO era reach its culmination sending the nation into a deep recession. Same with the S&L crisis, the commercial real estate collapse of the early 80’s, as well as two oil embargos of the 70’s. The weakest will always die first.

The Pandemic of 2019-2021 is simply another event, a more extreme agent given its global impact. The virus as well as government reaction triggered an increase in defaults and insolvencies beyond imagination and expectations. Like any of these earlier events, it affected weak companies first and worked its way inwards toward the relatively healthier businesses. Debt, debt management and the lack of financial flexibility are the pre-existing conditions which caused the first wave of defaults and insolvency. 

Trade credit insurance can change the outcome

Masks are not considered a cure of Covid-19, but masks can save lives by reducing the level of transmission to others. Trade credit insurance cannot cure the financial performance of weak performing companies laden with debt and limited financial flexibility. However, it can act like a mask and minimize the negative impact on the supply chain and change the outcome in the event of a default. More importantly, the economic event associated with the pandemic has not fully run its course as it relates to commercial defaults and insolvencies. There is more to come. Those businesses who have effectively utilized trade credit insurance have been wearing their “mask” long before this economic virus hit. Credit insurance helps healthy businesses remain that way, a preventative effort to protect itself against events which cannot be predicted or controlled. 

Credit insurance helps businesses understand the downstream risk associated with their customers (and suppliers). The resources employed by the main trade credit insurers are significant as is their ability to effectively track large portfolios of companies and trends. Many companies may be deemed uninsurable as their pre-existing conditions take on new significance as the broader economic situation deteriorates. This enhances the value of trade credit insurance. The ultimate objective is to avoid avoidable defaults and insolvencies to minimize the negative financial impact on the seller’s cash flow, earnings and capital.

Beyond the function of paying claims on indemnified losses under a trade credit insurance policy, these carriers help with the debt recovery and insolvency management of these events. In addition to monitoring existing customers within the context of the prevailing economic cycle, they will help guide the seller to healthier customers moving forward.

Every economic downturn is followed by an upturn, at least that has been true for the past 150 years. At some point, the “mask” will no longer be needed as herd immunity nears 100%. However, in business the risks of default remain regardless of the catalyst of any economic downturn. Even as the global economy rebounds, businesses that are highly leveraged or thinly capitalized will continue to have a high incidence of default. Many companies simply grow too fast with inadequate capital to fund their growth especially during an expanding economy. The “mask”, “trade credit insurance” remains one of the single most effective tools to help mitigate risks and foster healthy growth.

2019-2021 will go down as a unique period for a host of reasons. However, from a business perspective, the pandemic will simply be viewed as one more catalyst which triggered economic uncertainty. Beyond 2021, the hope is for growth and all that it entails. From a one-dimensional perspective of risk management, trade credit insurance remains a simple and cost-effective solution. As with the “mask”, investigating trade credit insurance’s value and benefits; it can’t hurt, and it will most likely help. 

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