Businesses in the US, Mexico and Canada are including letters of credit (L/Cs) in enhanced credit management strategies designed to mitigate the impact of the alarming surge of inflation on businesses, and the consequent need to take measures to protect their profitability and viability according to global credit insurer Atradius.

The latest Payment Practices Barometer survey conducted by the credit insurer shows that as inflation gathers pace, increasing pressure on businesses' liquidity and borrowing power is prompting them to strengthen credit risk management to protect profitability over the coming months.

Insurance, L/Cs and securitisation

The survey discovered that 70 per cent of the US businesses that already have insured their business-to-business trade receivables said they will continue to rely on this tool during the next twelve months, with many saying they will also complement this with other solutions like L/Cs and trade receivables securitisation. The comparable figures were 67 per cent in Mexico and 58 per cent in Canada.

Mexican businesses that preferred to purchase specific trade finance solutions rather than outsourcing credit risk management to a credit insurer, most often opted to use L/Cs the survey found.

Economic headwinds

Several factors including sharply rising energy prices, and the severe instability caused by geopolitical unrest, have sent the global inflation figure soaring to a level not seen for decades according to Atradius.

It says this has prompted immense concern for businesses worldwide amid fears it will increase the risk of business-to-business customers defaulting on payment of invoices. This is expected to pose a significant threat to profitability and, in the worst-case scenario, a danger of being pushed out of business completely according to the global credit insurer.

The Atradius Payment Practices Barometer surveys for the US, Mexico and Canada can be downloaded (in separate documents) from here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.