Credit management during the second lockdown

The second lockdown has been declared in Germany for the whole of November. It primarily affects certain specific sectors Germany-wide that also suffered a lot previously and have not been able to regain their usual level of turnover.

For many of these companies, the liquidity situation was therefore already very strained before the start of the new measures. Even though further government help is available - in some cases 75 % of the turnover of last November or of an average month last year - delays in the payout of the money are to be expected, which does not make the difficult situation any easier.

Here, the hotel and restaurant business should be especially highlighted, but suppliers in this sector are also affected. This includes breweries as well as the hotel and restaurant supply trade. Equally hit by the measures, as previously, is tourism and therefore the tourism companies, which have suffered massive cancellations of turnover or have been unable to realize turnover due to travel limitations.

The leisure industry has also been affected, for example fitness clubs. The whole of the events industry is in an equally precarious situation. And this includes constructors of trade fair stands and other related companies.

Finally, transportation companies should be mentioned, which are also experiencing lower demand, including the railways as well as bus companies.

From a credit management perspective it can be assumed that orders and contracts from these industries will decrease in volume. At the same time there will be problems in collecting payments on invoices due to the lack of turnover. For all of these companies the liquidity must be critically scrutinized if one has unpaid receivables as a supplier or before doing further business.

We should also consider the current position of European supply chains. Goods from southern Europe are subject to delays, which has negative effects for commercial supply chains, and ultimately also for the financial supply chain. In the area of large projects – including large public infrastructure projects – we will probably also see delays with financial consequences.

German companies that export to other European countries are now very heavily affected by the pandemic. In the other countries the corona regulations are much tougher, so that the economic consequences are even more drastic. Here, short-term payment deferrals in the event of direct turnover losses are certainly unavoidable in individual cases – but in the medium to long term this is no solution.

Capital market orientated companies are very active in the bond markets in order to maintain or build up liquidity provisions. In the medium term, however, this causes high debt ratios and risks in the continuation of financing. Credit managers should critically analyse their customers in this respect in order to reduce limits in good time. I assume that the credit insurance companies are also looking at this.

In Germany we should also remember that from 1st January 2021 the obligation to file for bankruptcy will be reintroduced for companies with excessive debts. In total, the number of insolvencies will therefore be much higher in 2021.

In the meantime we can certainly assume that it will take time before a vaccine will be available to the vast majority of the population and that the economic recovery from the pandemic will be slow; the economy may tend to stagnate or experience further setbacks.

What are the effects of the election result in the USA? With such a close victory, Biden will have to make compromises with conservative Americans if he wants to reunite the country. Therefore, no renunciation of protectionism in economic policy is to be expected in the short term, especially as it is currently also popular with the Democrats. Export will not get any easier. In the near future, the virus will also be the main focus in the USA. If there is no improvement in the virus situation there will be further negative consequences.

At the same time, in the coming year the negative effects of the Brexit, which has currently been pushed into the background, will need to be dealt with.

As a consequence, when allocating credit to customers there is no choice other than to play everything "by ear" and to check companies in critical industries, those which export to particular regions or have high levels of debt very carefully.