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COVID-19 Bankruptcies – how to ensure your company’s cash flow

When the COVID-19 pandemic hit the world, economists predicted a worldwide bankruptcy wave, which would topple companies in every country. In the worst case, insolvencies would increase worldwide by even more than 30 %. Fortunately, this bankruptcy wave never materialised.

What happened to the bankruptcy wave?

The main reasons for avoiding the anticipated bankruptcy wave are the support measures that countries kicked off at a very rapid rate. Many temporary amendments to both debt collection and bankruptcy legislation have been made in all countries.

These changes have made debt collection more difficult and prevented creditors from filing petitions for the bankruptcy of companies due to problems caused by COVID-19.

In addition, governments around the world have granted direct or indirect support to sectors suffering from COVID-19. These support measures have significantly helped companies survive during the worst parts of the pandemic.

Government support measures coming to an end

The temporary legislative amendments and support measures by governments came to an end in summer 2021 or they will end during this autumn at the latest.

Repayment holidays granted by banks are coming to an end and tax authorities no longer allow for payment postponements. This means that companies are gradually returning to the normal situation.

Many companies are now in a situation where sales have not yet returned to the pre-COVID-19 level, but interest payments and repayments of loans and other fixed costs must be paid in the normal manner. Many companies will face great difficulties because of this.

COVID-19 will have long-term effects

An increasing number of businesses are being closed in many countries, including Finland. It is likely that many companies will have to file for corporate debt restructuring or close their operations through bankruptcy.

Economists in credit insurance companies therefore predict that insolvencies will increase globally beyond the 2019 level.

Even though vaccinations are ongoing and economies are being opened in many countries, the COVID-19 pandemic is not yet over. The spreading of the delta variant of COVID-19 may re-accelerate the spreading of infections.

This will result in restrictions being re-imposed, which will make the situation difficult for many companies. As a summary, it can surely be said that there are currently major uncertainties related to the world economy and the risk level is extremely high.

Prepare for bankruptcies of clients and cooperation partners by obtaining a credit insurance policy

A credit insurance policy is one means to prepare for uncertainties and to manage your own business risks. Credit insurance protects your company’s balance sheet, financial results and cash flow from losses incurred as a result of unexpected credit losses.

This means that the insurance policy provides coverage when your client is unable to pay invoices.

The most important reasons for taking out a credit insurance policy are:

1. Credit insurance ensures the continuity of your company’s operations

All companies selling goods or services on credit are exposed to credit risks and credit losses related to clients. Credit losses weaken a company’s financial situation and profitability and they reduce cash flow. Credit insurance allows you to transfer credit risks to an insurance company and ensure that credit losses cannot damage your company.

2. Better credit decisions based on a larger pool of information

Credit insurance supports and improves your company’s credit management and control. Your company obtains access to the extensive company data maintained by insurance companies. You also obtain access to the credit insurers’ special expertise in the analysis and assessment of the financial status of companies. These two factors help your company make significantly better credit decisions. You also have the option to outsource credit management and debt collection to the insurance company.

3. Better financing terms from banks

Banks and financial institutions recognise the value of credit insurance as a tool for credit risk management. This improves the financing possibilities regarding working capital. In practice, your company may obtain better terms when the bank can use the credit insurance policy as collateral for financing. A bank or other financer may be included in the insurance policy as a beneficiary, which means that compensation would be paid directly to the financer in case a loss occurs.

4. Better competitive position compared to competitors

Your company’s competitive position improves when a credit insurance policy enables you to provide your current and new clients sales through open sales credit instead of letters of credit or other secured payment methods. This is increasingly important during the uncertainty caused by COVID-19, when new market positions are being sought.

5. Increasing sales safely

Credit insurance supports the growth of your sales. It works especially well when expanding to new markets or when your company needs to grant credit limits that exceed the limits recommended in internal instructions. Credit insurance can also be used to identify the clients and markets to which you can safely sell on open credit. This way you can increase your sales safely.

6. Peace of mind for the company’s management and stakeholders (corporate governance)

Credit insurance supports and strengthens the best practices for credit management and supports good corporate governance. It provides the company’s management, suppliers and other stakeholders and financers with peace of mind by protecting them from sudden, unexpected risks.

Our experienced experts are happy to help you learn more about credit insurance and how to obtain a credit insurance policy. With us, obtaining and managing credit insurance is simple and easy.

Timo Nisumaa

Insurance Broker

+358 50 427 3505

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