Trade credit risk is likely to grow in the coming years as the COVID-19 crisis joins a host of other issues impacting businesses in the UK. Now a report from QBE has found that trade credit risk has become more unpredictable than before, with political and economic uncertainty turning volatile and an increasingly changeable operating environment putting additional strains on businesses.
QBE’s Unpredictability Index, which surveyed business leaders in the UK, found that economic and political trends have become the main drivers behind growing unpredictability over the past 20 years – with 42% of the respondents saying political factors and 57% saying economic factors impacted large companies significantly.
Trevor Williams, head of credit & surety Europe at QBE, wrote in the report that economic events such as the financial crisis and the implications of Brexit have had the most significant impact on businesses in the UK.
“Since the financial crisis, key economic indicators and political events have become even more unpredictable, with outcomes that have bucked normal trends,” Williams said.
Meanwhile, political volatility currently drives trade credit risk as Brexit uncertainty and paralysis have driven up UK solvency rates and put pressure on various sectors.
“Our survey found [that] UK businesses were the most pessimistic about the short-term outlook. Against the backdrop of Brexit, UK firms were the only ones to be more likely to say the next 12 months is unpredictable than predictable,” he said. “However, when asked about the next 10 years, they fall back into line to match the confidence levels of businesses from other countries.”
“We already see an increasing trend in insolvency as a result of Brexit uncertainty and paralysis. UK company insolvencies hit a five-year high in the second quarter of 2019, according to government data.”
Williams clarified that political and economic risks are related to other drivers of unpredictability, including environmental and technological factors. He noted that the global business environment continues to become more challenging and uncertain than before, with the rise of nationalism and protectionism most likely to “hinder international trade and raise the risk of regulatory and fiscal actions against foreign companies.”
“Fears continue over a slowdown in China while US trade disputes with China and the EU are affecting trade – the disputes are forecast to reduce the level of global GDP growth in 2020 by 0.8%,” he said.
Climate change and digitalisation have also changed consumer behaviour through the years – leading to increased risk of insolvency and non-payment. The food, retail, and automotive sectors experience structural changes, while the agriculture sector faces behavioural changes due to societal trends and environmental factors.
“Loss of revenue, unexpected costs, and decreased demand are the three biggest impacts of unpredictable events. This chimes with what we see in sectors that are particularly exposed to economic, political, and structural uncertainty at present. The index also revealed that periods of stability are becoming shorter and periods of instability longer,” Williams said.
Williams advised companies to focus on becoming well-informed, especially because business intelligence is now widely accessible. However, he warned that analysis should focus not only on risks but also opportunities.
“Good business practice and a focus on cash flow are critical, even more so in periods of uncertainty,” Williams said. “With the fast pace of change and unpredictability, businesses will need to be flexible, able to move with the market and anticipate the potential impact of unexpected events or drivers for change, whether a new technology or climate change.”
“Organisations will also need to build their trade credit resilience, which may require tighter payment terms and conditions, measures to mitigate losses or creating a more diverse customer base,” Williams concluded.
