Economic uncertainty has been rampant these past few years. First the pandemic, then the Suez Canal, a cascade of other supply chain issues, the Russia-Ukraine war, inflation, and now, the looming threat of recession. Current events are wreaking havoc throughout business and industry, so what’s the impact on commercial credit?
Supply chain disruption
Most industries continue to struggle with supply chain challenges. These disruptions create problems for every business sector at every level, and commercial credit is no exception. Low supply means limited production and ultimately, a reduction in revenue. Decreased revenue results in payment delays and either fewer new accounts or an increasing reliance on credit with limited prospects for repayment. For most companies, the choice is to either wait for revenues — and purchasing power — to increase, or risk overextending on commercial credit. With the danger of default rising, commercial creditors and debtors continue to scramble for supply chain solutions.
High demand isn’t limited to materials and other supplies. Despite dropping unemployment numbers, labor shortages continue to cause challenges across multiple industries, with significant financial consequences. Like supply chain disruption, labor shortages lead to decreased production capacity, low revenues, delinquent accounts, and fewer new account prospects. Without the necessary workforce, it’s difficult for companies to adapt to changing circumstances while simultaneously managing debt.
It’s a catch-22. Many people cite insufficient pay as motivation for leaving their jobs, but a lack of labor can impair a business’s ability to produce enough to pay its employees. Add this to an increasing retirement rate — and the waxing and waning threat of COVID-19 — and it’s easy to see why a labor shortage with no end in sight might contribute to commercial credit hesitancy.
Inflation is an alarming word in economic circles. With all the chaos in recent years, inflation continues to rise, and neither creditors nor debtors can be certain how high prices — and interest rates — will climb. Even financial analysts disagree. Some expect inflation to stabilize as supply chain problems are resolved, and others are predicting recession. Low economic confidence discourages commercial credit purchases, and monetary policy moves are adding to the uncertainty.
Last month, the Federal Reserve increased benchmark borrowing rates by three-quarters of a percentage point “to control cost-of-living increases running at their highest levels since 1981, central bankers said. They said they will continue to do so until inflation gets close to their 2% long-run goal.” And rates are likely to go up another 50-75 basis points this month as the Fed seeks to bring prices under control — at the risk of stalling economic growth. Economics is a delicate balancing act, and monetary policy frequently aims to repair one long-term problem at the risk of causing another.
All this leads to more economic uncertainty and reduced willingness to extend or take advantage of commercial credit opportunities.
With so many disruptions affecting commercial credit, preparing for the challenges ahead is a critical strategic move. Prioritize staying informed, make plans to adapt, communicate frequently with customers — especially those struggling with payments — and consult with financial professionals equipped to help manage your company’s credit risk.