Effects of Inflation on Credit Management

In January, we had year-on-year inflation in Germany of 8.7%. This is causing prices to rise sharply in almost all sectors.

In the construction sector, the rise in prices is being supplemented by interest rate increases for construction loans. As a result of the high interest rates and price increases, many private builders can no longer afford the property they originally envisaged. In the case of rental properties, the investment no longer pays off in many places, because rents cannot cover the financing costs of new construction. The outcome of this is declining order backlogs in the main and ancillary construction trades, leading to financial bottlenecks. It is therefore important for customers' credit management to keep a close eye on the order backlog and the order situation.

Another issue is procurement prices and wages and salaries. Most companies should be able to identify price increases in this area. Problems arise when these price increases cannot be passed on because long-term fixed prices exist on the customer side. This issue can only be sustained for a longer period of time if the company has a good liquidity position.

If the increased costs can be passed on through own price increases, it must be critically examined whether customers are willing to purchase the services and products to the same extent or at all. If demand is reduced, it must be clarified whether capacity adjustments are possible in the affected companies or whether empty costs arise because fixed costs cannot be reduced. This could lead to distortions.

Another aspect may be the situation of companies that depend heavily on exports and are in international competition. Europe is particularly affected by high energy prices and interest rate increases. If there is competition on the world market from other regions, companies may be subject to price competition and planned sales may migrate.

Consumers are particularly affected by price increases. Particularly if this leads to real income losses, as wages and salaries do not rise to the same extent. Experience shows that this leads, on the one hand, to private investments being postponed, for example in new electrical goods, furniture, or cars.

On the other hand, visits to restaurants, for example, are reduced, people save on vacations, and so on. This also has to be taken into account when analyzing companies in the relevant sectors.

Finally, one must pay attention to follow-up financing in both the private and business sectors. Do financing contracts expire and to what extent can the borrower afford the higher interest rates or how does the respective financing object still pay off then, is to be clarified thereby.

In this respect, high inflation has a whole range of consequences that credit management must be prepared for. Liquidity bottlenecks that arise are very often recognized by changes in incoming payments from customers. It is important to be vigilant here. A comprehensive examination of the customer base is necessary to avoid unpleasant surprises. I wish you every success in this endeavor.