If your peak trading period is concentrated over a few months, it can be more difficult to bounce back from a financial shock. Coface’s Andrew Share looks at how seasonal businesses can mitigate their trade risk.
We all hope next month’s Coronation, an extra bank holiday, and the prospect of better weather combine to provide a welcome boost to the UK economy, but the pressure will really be on companies to make the most of this window of opportunity.
The stakes are particularly high for sectors like food and drink, retail, and tourism, which traditionally have to navigate peaks and troughs of demand throughout the year. Sadly, some businesses are already struggling amid more challenging trading conditions caused by escalating running costs, higher interest rates, supply chain issues, and weak consumer demand. According to the latest Business Insights report (6 April 2023) from the ONS, “the accommodation and food service activities industry had the highest proportion of businesses reporting some form of concern”, with energy prices (55%) and inflation of goods and services (18%) being mentioned the most. This month, it was reported that more than 150 pubs in England and Wales have closed their doors permanently in the first quarter of 2023.
With many businesses keen to make hay while the sun shines, there will be some who will take a chance on a new supplier or accept any order that comes their way. But while success entails taking calculated risks—on the weather, consumer behaviour, etc. A setback like the failure of a customer or major supplier would allow little time for recovery, and the shock could prove fatal. It’s particularly important that seasonal businesses are able to balance the potential rewards against the risks and mitigate them as far as possible.
Here are five questions to consider and five ways Coface can help:
1. Can I have confidence in our customers?
Corporate insolvencies are rising as a symptom of the economic downturn and are yet to peak. According to the latest official figures, 1,783 companies were registered as insolvent in February 2023, up by 17% in February 2022 and by a third in February 2020. And each company’s failure is likely to cause knock-on financial pain for those along the supply chain.
For seasonal businesses, the picture is complicated because you might not deal regularly with a customer and be in a position to monitor tell-tale changes in their payment behaviour. Even if a business was financially healthy and paid promptly when you last traded with them, things can change quickly, and you may get caught out if you rely on standard credit checks, references, or publicly filed accounts to make credit decisions.
To get real peace of mind, you need reliable and current business intelligence. Coface business information is able to provide a complete and current picture of a company’s credit risk, taking into account information on more than 130 million companies in our global database, more than 700 in-house risk analysts and underwriters, and payment incidents notified by our 50,000 credit insurance clients and global partners. Our unique Debtor Risk Assessment (DRA) scores show their probability of payment default over a twelve-month horizon and are used by our own underwriting team, so we have an interest in getting them right. A high DRA score should give you a high level of confidence that you’ll get paid.
We can also provide URBA, a 360-degree view of a risk, compactly providing the key points of data. Additionally, we offer traditional credit report opinions, a limit we would be prepared to cover as an insurer. Importantly, we have a wealth of expertise and solutions to support your needs.
2. What supply chain risks do we face?
Supply chain disruptions could be seriously damaging for seasonal businesses, so you need to be able to anticipate potential issues and make contingency plans.
Confidence in global supply chains and the ‘well-oiled machine’ of just-in-time deliveries has been shaken in recent years by repeated blows from pandemics, Brexit, war, adverse weather conditions, and rising commodity prices, which have squeezed margins for everyone in the supply chain. Your exposure will likely depend on a range of sectoral factors, like the perishability of goods, how many steps it takes to get from raw material to end product, and where your business sits in that value chain, as well as simple geography.
Available from our Business Information Team, Coface’s Supply Check service helps you evaluate the solvency of new suppliers and monitor existing ones for changes that might affect their ability to deliver on their commitments. In addition, some of our trade credit insurance policies provide the option of advance payments to suppliers, so you can protect yourself in the worst-case scenario. And if you want to stay up-to-date with trade conditions across 160 countries and 13 industry sectors, take a look at our free expert assessments of social, economic, and political risk factors and insolvency/payment trends.
3. Can we protect our bottom line?
Preparation for regular events and seasonal peaks happens months, even a whole year, in advance, which means businesses are tied into a series of predictions about the products they believe will sell, the quantities they need, price points, storage and distribution requirements, and, of course, levels of demand.
This isn’t easy at the best of times, and as we know, these are not the best of times. Household disposable incomes have been hit by the cost-of-living crisis, which is affecting levels of spending and influencing behaviour. It’s up to companies to find the right balance between protecting their margins and not deterring price-sensitive consumers.
With so many plates spinning, it makes sense to take what measures you can to protect your business. Careful credit risk management is a must—due diligence, obtaining DRA scores, monitoring overdue accounts, etc. But you can get extra comfort with credit insurance for losses arising from a customer’s non-payment or insolvency. Coface has cost-effective solutions to fit every type of business, and we can accommodate the peaks and troughs in your trading year. And because we know time is of the essence, you can usually expect a validated claim to be paid as quickly as within 30 days in cases of insolvency. There’s also an early claim payment option for protracted defaults.
4. Can we obtain the necessary funding?
The era of cheap access to finance is coming to an end; there is speculation that the Bank of England may raise interest rates again before they stabilise, which means companies that are coming out of loan periods might find it tougher to negotiate favourable terms.
If commodity prices and energy costs have risen faster than you originally budgeted for, you may need additional funds in order to tide you over. If you find yourself in this situation, it can help your case if you can reassure banks and other lenders that your business is not exposed to erratic financial risk. A credit insurance policy is evidence that you have an effective credit risk strategy in place.
5. What options do we have if a customer doesn’t pay?
You shouldn’t be reticent about delinquent accounts, but it can be difficult to know how to recover the outstanding debt from the customer without harming your business relationship. It can also be an unwelcome and time-consuming distraction for a seasonal business, especially if the customer disputes the invoice.
By outsourcing debt collection to Coface, you can manage your business through busy periods while our specialist agents contact debtors and follow up on your behalf. Their prompt intervention and professional approach generally get quick results and can help resolve disputes before they reach an intractable and expensive stage.
Business Information Director