In a year when the pandemic dominated the international agenda, the number of bankruptcies fell significantly. However, this apparent ‘business as usual’ turns out to be something of an illusion, as many companies have been artificially kept alive by government support measures. As vaccination coverage rises and the pandemic loses momentum in many countries, the real economic impact will slowly become clear.
Despite the deep recession caused by the COVID-19 pandemic, the expected global spike in bankruptcies did not materialise last year. In some of the largest economies, the number of business failures fell by double digits. For example, in March 2021, France experienced 40% fewer bankruptcies than in March of 2020. The figures also look positive in Spain (-14%), Germany (-17%) and the United Kingdom (-27%).
Dual support mechanisms
Unfortunately, that data does not reflect a decline in the number of ailing companies. In fact, everything indicates that a less rosy scenario is emerging. First, governments and banks have temporarily adjusted the conditions that qualify a company as insolvent in favour of the ailing party. In addition, companies have also benefited from numerous supports, such as VAT reductions, payment deferments, and allowances.
We can, of course, only be grateful for the lifelines that governments have thrown companies. But those measures will sooner or later come to an end. A big question mark hangs over what will happen once they are phased out. The transition to a coronavirus-free society will not only lead to a jubilant mood, it will also force a painful confrontation with reality for many companies.
Revival or postponement of execution?
Research by data expert Graydon indicates that one in ten companies was ringing the alarm bell before the coronavirus crisis. The question is, how many of those companies are now sailing a new, profitable course, or have they merely been granted a stay of execution?
But COVID-19 hasn’t only put pressure on financially vulnerable companies; many previously healthy companies are also finding themselves in troubled waters due to the health crisis. Simulations by the European Commission show that, without government support, the number of EU companies with liquidity problems would have risen to 23% by the end of 2020. So it seems likely that the number of companies with liquidity and solvency issues will increase after the coronavirus crisis passes.
What does that mean for the debt burden between companies?
The impact will remain limited for the time being. The share of non-performing loans (NPLs) for eurozone corporates amounted to 5.23% of total loans in Q2 2020, more than 1% lower than a year earlier. Government credit guarantees and loan repayment moratoriums have so far prevented an increase in the number of defaults. For example, figures from the European Banking Authority (EBA) reveal that loans under moratoriums amounted to as much as €587 billion in the third quarter of 2020, of which about 60% comprised corporate loans.
Rising number of problem loans on the way
Once the unprecedented government support measures come to an end, more companies are likely to experience difficulties in meeting their debt obligations, leading to more NPLs and insolvencies. The European Commission shares this concern, and it seems to be already taking place in the UK. According to international law firm White & Case, NPL volumes at four of the largest British banks were already 8.63% higher at the end of 2020 than at the end of 2019.
High time for optimised credit management
The extent to which customers will be able to pay their debts will depend on their initial debt position and solvency, the impact of the crisis on their business operations, and their income prospects. Regardless of their business activities, it seems plausible and even desirable that many companies will arm themselves proactively against defaults and hopeless debt collection procedures. There is no doubt that digital and automated collection solutions offer an obvious solution.
Factoring as a future-oriented choice
Factoring fits seamlessly with companies’ needs in the field of credit management today and in the future. It allows them to improve liquidity, free up money for new investments and operate competitively in the market.
Efficient and intuitive factoring thanks to Aptic
Aptic’s software solutions make it possible for you to develop your own highly efficient digital factoring services using a flexible, scalable, and self-learning application. Aptic offers a market-leading factoring system that can be delivered as Saas, Hosted, or an On-Prem solution. It is a comprehensive platform with solutions for the entire invoice life cycle; payment solutions for e-commerce, ledger management, lending, leasing, factoring, and debt collection. Thanks to a high degree of automation and personalisation, the solution helps you achieve maximum efficiency while you retain full control over your factoring services and all your credit processes.
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