Businesses must be prepared for insolvency spike ahead By Mike Thomas, Director of Risk Services of trade credit insurer Atradius
At the onset of the pandemic, economists universally predicted a global recession and a surge in insolvencies. But as governments worldwide reacted to limit the impact of the pandemic through fiscal support measures and anti-bankruptcy measures, the expected insolvency spike did not materialise. In fact, in 2020 UK insolvencies even declined as much as 27%.
However, as support schemes are now gradually withdrawn in line with economic rebound, we now stand at the cusp of another challenging time for trade. The latest economic research by Atradius reveals UK insolvencies will start to tick up in H2 2021, rising overall by 7% this year. In 2022, year on year UK insolvencies will then peak, rising by a hefty 70%. But as this rise is based on artificially low levels, Atradius economists have compared insolvency forecasts to a pre-pandemic baseline to give a more accurate reflection of the rates. The analysis reveals UK business insolvencies will be 33% higher in 2022 than in 2019.
The surge in insolvencies is shaped by three forces. First is the delayed effect of bankruptcies that would have occurred in 2020 in the absence of fiscal schemes and changes to insolvency proceedings. Secondly, the phasing out of support schemes is expected to trigger an increase of insolvencies towards ‘normal’ pre-pandemic levels. This includes the collapse of so-called zombie firms, whose financial situation is too weak to survive once economic circumstances return to normal. These zombie companies may be able to buy themselves some time by running down their cash but we expect these to manifest into bankruptcies within the four quarters of fiscal support ending. Finally, the third force is the elasticity of insolvencies to GDP changes which has been effectively suspended throughout the pandemic to date. All of this means that the forthcoming wave of insolvencies is inevitable and, unfortunately, inescapable.
The most important thing businesses can do now is to be prepared. In such an uncertain
and potentially volatile trading environment, information is critical. Businesses must build up
comprehensive insights into buyers and their ability to pay through real-time monitoring
alongside a robust credit management strategy, flexibility to adapt should warning signs
arise and non-payment protection. All of this is part and parcel of what trade credit insurance
The good news from Atradius is that we are underwriting higher cover levels proportionate to the level of trade now than prior to the pandemic. As a trade partner, Atradius supports businesses throughout every step of the journey; identifying new opportunities, managing risk and providing protection from the detrimental impact of non-payment helping businesses stay one step ahead no matter what the future brings.
For more information and a suite of free economic, payment and country reports, visit the publications pages of the Atradius website https://atradius.co.uk. You can also follow @AtradiusUK on Twitter and AtradiusUK on LinkedIn.
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