Growth but not at any cost

"When a company grows too fast it can encounter problems. (...) If growth is not well managed it may bring the company down."

In a world where little can be certain, businesses must do all they can to prepare for and protect from unexpected events.

If we have learnt anything at all since the turn of the century, it is that not all growth is good. In difficult times, businesses must be sure that they have a strong business model and sustainable cash flow.

When a company grows too fast it can encounter problems with suppliers; systems and processes may not be able to keep up; there may not be enough personnel either within the company or available for hire. The challenges vary across sector and geography, but one commonality is that if growth is not well managed it may bring the company down.

The last two decades have brought unprecedented technological advances and fundamental systemic change, much for the good, yet the impact from financial crises and the recent Covid-19 pandemic show how vulnerable individuals and companies are on a global scale.

It is all too recently that we have seen the disruption a worldwide crisis brings to businesses both small and large. Supply chains have been interrupted, employees have been unable to get to work, frontline services have been all but exhausted and the risk of insolvencies increased significantly.  

In these challenging times all businesses, but particularly those whose order book is dominated by a handful of clients, need confidence they can not only survive but grow without leaving themselves exposed to events that are beyond their control.

Businesses must know that their largest clients are not going to be dragged under by the latest crisis, taking their own operation down with it. Yet, if businesses are overly cautious, fearful of the worst, they might refuse to extend credit to those clients who have the potential to deliver important revenue streams for the future.

Clearly then, companies need to be sure that they can extend credit to key clients; that invoices will be paid on time; and that cash flow will be reliable. Ultimately businesses need to be able to capitalise on growth of their clients in a sustainable and secure way.

Trade credit insurance is one way of not only giving peace of mind should the worst happen, and a company defaults that cash flows will not be disrupted. Yet it is much more than risk management. Trade credit insurance can provide unique support to companies as they grow.

Identifying good growth is critical for businesses that want to build their operations. While most businesses will conduct due diligence on existing and prospective clients, there is only so much time and attention that can be spent before it impacts on the day job.

Allianz Trade’ Trade Credit Insurance covers 85 million companies across the world providing a credit rating and score for each. In real time, businesses can review their client base, identify those that are thriving and offering real growth potential, against those which are on the brink of insolvency.

Trade credit insurance can provide businesses with an early warning system, alerting them to potential insolvencies in their client base. This means they can take early positive action to avoid a default and the disruption this can cause.

As a consequence, resources can be directed to doing what the company does best and focus on achieving long-term growth.

Building the company pipeline of new business is critical to growth yet chasing prospective customers without a true understanding of their strength puts businesses at risk. In the same way trade credit insurance can provide ratings for existing clients, the service can also identify reliable sources of future revenue, while diverting attention from those that look less viable. Businesses are then free to dedicate their efforts to stronger prospects. At the same time, being able to access reliable company information arms business with the knowledge to expand sales strategies to targets that may otherwise have looked out of reach.

Businesses may often avoid larger clients fearful that they will create concentration risk, yet these may actually prove a fruitful source of long-term revenue.  Trade credit insurance provides invaluable insight into all companies allowing business development managers to make an informed call on which genuinely pose a risk, and which could be hugely beneficial.

Holding money back to cover bad debts is a thorn in the side of every finance director. Capital that could otherwise be used to invest in the company or find new business, is diverted to cover the failings of clients. Taking out trade credit insurance eradicates the need for such large bad debt reserves and frees capital for reinvestment, expansion and ultimately growth. Other benefits include tax breaks on credit insurance premiums which are obviously not afforded to bad debt reserves.

The spoils of building a successful multinational company are clear yet expanding into foreign markets is not without risk. The Covid-19 outbreak is just one recent example of how a global crisis impacts countries in different ways.

Not only must companies identify the best customers to target, they need to find the most promising countries and regions. Political and regulatory factors play a significant factor and since these can change so rapidly; businesses need trustworthy intelligence on which to base decisions.

Allianz Trade trade credit insurance service is informed by 1,700 credit analysts based in 62 countries giving a unique insight into both companies and geographies worldwide. Regular country profiles provide reassurance or early warnings about political and economic situations, which help manage risk and pursue growth opportunities.

Trade credit insurance also allows companies to offer competitive credit terms to their clients, giving them an important edge in challenging global markets.

If the global financial crisis showed us anything, it is difficult to secure credit when the world is in crisis. Regulations since the market collapse of 2008 mean some lenders must hold more capital on their balance sheets, while others impose more stringent rules around debt. The European Solvency II, and Basel II and III directives are just a few examples of the stricter framework in which lenders now operate.

As a consequence, businesses may find they are unable to secure much needed support for expansion and growth.

Taking out trade credit insurance can help improve a company’s chances of securing a loan since banks are often more willing to lend to businesses that are not vulnerable to bad debt. By eliminating some of the third-party default risk, banks may be more inclined to support business with financing and loans. However, it is important to remember that trade credit insurance is there to protect against catastrophic loss, rather than be used to leverage finance

Whilst it may be tempting to turn to trade credit insurance when a problem with customer defaults or insolvencies are on the horizon, the chances are this will already prove too late. Taking out policies early can allow companies to focus on growing their businesses, rather than repairing damage. Companies need to know they have the premiums in place to cover bad debts irrespective of market conditions since that confidence allows them to push forward and develop their operations.

Trade credit insurance is more than a safety net, it provides a vital framework int which companies are free to focus on their businesses to target the biggest and best clients and to secure critical financing that might otherwise be unavailable.
In a world where so much is uncertain there is much to be said for a tool that provides not only financial security against default, but the chance to expand at home and overseas

• Better financing terms – Banks will typically lend more capital against insured receivables and may also reduce the cost of funds.
• Reduction in bad-debt reserves – Insuring receivables frees up capital for the company. Also, credit insurance premiums are tax deductible, but bad debt reserves are not.
• Actionable economic knowledge – The trade credit insurer’s information database and technology platform help reduce operational and informational cost.
• Increase in sales and profits – A credit insurance policy can typically offset its own cost many times over, even if the policyholder never makes a claim, by increasing a company’s sales and profits without additional risk.
• Protection against non-payment and catastrophic loss – Should an unforeseeable event catch a company and its insurance carrier without warning, the bill gets paid via the claims process.
• Sales expansion – If receivables are insured, a company can safely sell more to existing customers, or go after new customers that may have been perceived as too risky.
• Expansion into new international markets – Protection against unique export risks and market knowledge to make accurate growth decisions.
• Improved lender relationship – Trade credit insurance can improve a company’s relationship with their lender. In many cases the bank requires trade credit insurance to qualify for an asset-based loan.