USMCA companies strengthen credit risk management

The alarming surge of inflation due to sharply rising energy prices and the severe instability caused by geopolitical unrest, has prompted immense concern for businesses worldwide amid fears it will increase the risk of B2B customers defaulting on payment of invoices. This is expected to pose a significant threat to profitability and, in the worst-case scenario, a danger of being pushed out of business completely.

Companies in the USMCA (United States-Mexico-Canada) region addressed this concern by greatly enhancing their management of credit risk arising from trading on credit with their B2B customers, a survey by Atradius reveals. USMCA companies that opted for managing the issue in-house told the Baltimore-based company that the primary method used was to make more regular credit checks of customers to detect any warning sign of likely default on payments. This was reported by 53% of USMCA businesses, spiking to 61% in Mexico. Companies polled also told the global credit insurer that they very often tried to speed up cash flow by offering B2B customers discounts for early payment of invoices, or allowed customer shorter time to settle payments for their purchases on credit to customers. This was particularly reported both in Canada and Mexico.

However, with interest rates rising due to inflation, the powerful motivation of USMCA companies was also to get easier access to external funding in case they should cover potential liquidity shortfalls due to customer payment default. A clear finding of the survey was that USMCA businesses have grasped the relevance of strategic credit management to navigate the current times of soaring inflation potentially pushing up customer credit risk. In particular, two in five companies polled in the USMCA region acknowledged the value of credit insurance as a strengthening device of their borrowing power. This due to increased bank security coming from having transferred the payment default risk of their B2B buyers on a specialized credit insurance company.

Gordon Cessford, the Atradius Regional Director for North America, said: “While inflationary pressures are broad-based worldwide, a strong upward push to the figure in the USMCA region is a result of the spill-over effects of soaring energy and commodity prices at global level. We see that USMCA companies struggle to alleviate such pressure, thus increasing their liquidity needs to run their business operations and driving up costs. For many companies strategic credit management has represented the most logical step to protect profits and cash flow, while at the same time mitigating customer credit risk during this period of dramatic surge in inflation and unsettled economic times.”

The Atradius Payment Practices Barometer survey discovered that 70% of the US businesses that already have insured their B2B trade receivables said they will continue to rely on this tool during the next twelve months, with many saying they will also complement this with other solutions like letters of credit and trade receivables securitisation. The comparable figures were 67% in Mexico and 58% in Canada.