As many companies reconsider their supply chain strategies amid COVID-19, businesses should look at credit risk mitigation as a strategic tool to minimise disruption to trade.
Broken supply chains and tightening economic conditions are putting massive pressure on businesses, especially SMEs, thus increasing the risk of credit default.
“Credit risk is increasing and will have an impact on companies’ financial results in the forthcoming months,” said Aon head of credit solutions, Asia Steve Taylor.
With businesses considering more diverse supply chains to minimise the impact of future economic and pandemic events, the need to mitigate counterparty credit risk should be a priority.
“New or current suppliers may require payments in advance, which creates a financial risk of supplier non-performance. Insurance can mitigate this risk and support the financing required for pre-payments,” said Mr Taylor.
He added that when using credit insurance, the policyholder should check closely the terms and conditions of the policy and “paying particular attention to the scope of cover and exclusions”.
“Communication with the broker or insurer is critical, early and open dialogue being key, particularly where there are non-payment events,” said Mr Taylor.
The economic fallout from COVID-19 is likely to be significant, with early indications showing a worse-than-predicted impact on China’s economy with the country’s exports in February contracting by nearly 20%.
While the outbreak has slowed in China, any potential recovery in the Chinese economy is complicated by slowing demand from other countries as the virus spreads across the world. M