UK: The next priority - managing credit risk
It has undoubtably been a turbulent few weeks for businesses following the rapid onset of coronavirus. Whilst there remains a great deal of uncertainty, businesses are starting to get to grips with the effects of the virus and the response measures required in the near term. Government schemes, notwithstanding their shortfalls, are providing some certainty and relief on imminent cash pressures.
As the effects of Coronavirus materialise however, an overlooked consequence for businesses is that of credit risk across their client base. Over the coming weeks, there is much discussion of a wave of businesses and clients experiencing severe financial difficulties which will likely be the next challenge that CEOs and CFOs need to wrestle with:
- Financial stress amongst customers will present significant issues for those with recurring revenue and subscription models, despite seemingly having natural protections against credit risk. Being in uncharted territory, previous experiences in downturns may not be good indicators of behaviours, especially when livelihoods are put under sudden strain, fuelling further uncertainty and volatility
- As businesses, and indeed individuals, enter into financial difficulty, the textbook response is to review standing orders and direct debits to conserve cash in the immediate. This may be a short-term deferral but could also be cancellation of what is deemed “unnecessary” expenditure as the company faces potential restructuring. What have historically been seen as essential costs that were protected above all others could now be under pressure,quite simply there will be entities who will be unable to pay
- Understanding the impact of the virus on customers of differing or unknown financial standings and with direct and indirect exposure to various markets is challenging. Ultimately, underlying customer credit risk has the potential to considerably weigh on cash in the near or medium term and it is therefore increasingly important that businesses secure sufficient liquidity headroom to absorb the impact
Summary
Our advice to business leaders is to take a prudent view when assessing liquidity requirements. There is the potential for the above impacts to domino through supply chains, exacerbating what is an already a challenging environment.
Please be proactive and ensure that the above is considered in tandem with other more direct impacts when trying to secure extra liquidity.
Clearwater has an established team of experts in financing and are actively supporting many of our clients through this difficult period.
