Just before the coronavirus (COVID-19) outbreak, the number of insolvencies has increased for the first time since 2008, and global economic growth was forecast to fall to its lowest levels since the financial crisis (1).
As the pandemic spreads, the picture of the global economic environment has become increasingly bleak. Disrupted supply chains due to initial outbreaks in China and other parts of Asia make sluggish progress in recovering now that the U.S. and Eurozone economies sink deeper into the COVID-19 quicksand. Severely affected sectors have witnessed layoffs and insolvencies at alarming levels.
Depending on its size, a company becoming insolvent in the age of coronavirus could have a drastic domino effect on its supply chain. The losses suffered from one company's inability to pay its debts can put constraints on others' liquidity to the point they also fold. Being caught up in this chain reaction would be the last thing any business would want in the current economic situation. It is imperative to assess your customers' default risk now and mitigate it before it could harm your company's cash flow.
Even during the coronavirus crisis, most businesses do not become insolvent overnight. There is a range of crucial factors that you can take into account to detect your customers' potential liquidity issues. The more negative answers you give to those factors, the higher your customers' default risk is.