With a booming U.S. economy, why are some businesses preparing for a recession? As history would tell it, the longer an economic boom lasts, the closer we’re getting to a downward spiral. In modern history, a recession has occurred approximately every eight years. It’s the economic ebb and flow that simply can’t be avoided. With the last recession ending in 2009, economists are saying entering another is not a matter of if, but rather a matter of when. So, what could cause a recession? How might it affect companies? And, how can businesses prepare themselves in advance?
Causes of a Recession
Tariffs put in place by the Trump administration could cause an increase in prices on many goods in the US, causing inflation and increased rates for businesses that will move their way up the supply chain. This has many executives on edge, causing companies to pull back on spending and keep tighter reins on finances. Prices for steel and aluminum are expected to raise for businesses and consumers. All of the uncertainty surrounding trade could affect corporate spending in a big way. Decision makers tighten the limits, which trickles down throughout the economy.
Today, inflation might be caused by the trade war, which will cause oil prices to spike. Sudden hikes in the price of oil have always affected the nation’s economy. For companies, they make transport costs higher, causing cutbacks in orders and shipments. A high price of oil equals a high price of business operations, meaning the price of oil also affects other production and manufacturing. A halt in manufacturing orders such as durable goods trickles down the pipeline, leading to a loss of both quality and quantity.
Effects on Trade Credit Lines
Clearly, a recession would have an impact on trade credit lines and accounts receivable portfolios. Businesses may start paying their providers and suppliers late, with partial payments, or not at all. Delinquent or severely late payments could cause other providers to tighten credit limits or stop extending completely, disrupting cash flow and ultimately supply chain. This cycle could position a business unable to repay its debts, eventually leading to closure or bankruptcy.
What to do?
Economists are making predictions that another recession is inevitable, with some estimating 2020. Cortera recommends lenders to keep a close eye on the companies where credit is extended. Best practice is daily monitoring to identify changes in risk and monthly portfolio reviews to take a deep dive into accounts and identify broader trends. Information with indicators into the financial health of a company will be important, as well as predictive capabilities so you can identify potential for default in time to act.