Credit risks in times of recession

Economies worldwide, including Germany, are currently facing major challenges: inflation, rising energy costs, higher interest rates, falling demand, supply chain issues and staff shortages – and those are just the main factors. Many countries risk sliding into recession at a time when the global economic and political landscape is also shifting fast. Against this backdrop, companies around the world are taking a long hard look at their own financing, especially their liquidity position, because if a company is not liquid enough it ultimately risks insolvency.

Around the world, supplier credit continues to be one of the most recognised and widely used mechanisms for procurement financing. Supplying goods or services on credit helps protect the liquidity of the buyer. However, the looming threat of recession is shaking trust in supplier credit. Buyers are facing major challenges because they can't access the necessary credit limits; meanwhile, suppliers are seeing receivables for their products and delivery services – a vital component of their balance sheets – drop enormously in value through payment delays and even defaults.

More than ever, good credit management – including default-risk estimates – is vital when it comes to guaranteeing supplier credit. The COVID-19 pandemic has already demonstrated that, for businesses in particular, traditional estimates of creditworthiness based on balance-sheet figures and past payment practices do not always tell the whole story. Commercial credit insurance therefore has an important role to play – but with that comes enormous responsibility, too. The German Insurance Association (GDV) estimates that in the past year credit insurance losses have risen by around 45% to 914 million euros. Moreover, this year, it is predicted that the number of businesses becoming insolvent could rise from 15% to 20%. Credit insurers can continue to offer reliable risk estimates and appropriate insurance cover. However, it is important that they do not place too many restrictions on the provision of this cover.

Dr. Kai Engelsberg, LL.M.

Member of the Executive Board | Credit Solutions Germany