During the months of health crisispublic aid to companies mainly increased displayed for the general public through State Guaranteed Loans (PGE), to such an extent that many of the parallel measures put in place by the government seem to have been eclipsed.
However, many other support levers have been essential to the survival of the French economic fabric. This is particularly the case of credit insurance supplements (CAP) which have just as much preserved companies from filing for bankruptcy.
Credit insurance, the mainstay of cash flow in times of crisis
Credit insurance is a key mechanism in managing a company’s finances as it provides security against customer defaults. To this is most often added factoring, which finances operations: bank subsidiaries buy back the invoices to be paid by customers and advance 90% of them to the company, for the duration of the payment period (60 days ). These two tools make it possible to ensure an influx of cash while awaiting settlements to deal with both the risk of a lack of liquidity, but also the possible bankruptcy of debtors.
This mechanism thus constitutes a shield essential in times of crisis. However, exposure to treasury risks increasing with the deterioration of the economic context in early 2020, some companies were denied these guarantees due to the high degree of uncertainty surrounding global economic activity. The State then released an envelope of 12 billion euros in order to reassure credit insurers and allow them to continue to cover the real economy.
This system is now coming to an end, but the risks remain significant. As such, credit insurers are now choosing to take over from the State and continue to cover these risks on their balance sheet, but sometimes with a lower level of exposure. This causes the vulnerability of the most fragile companies.
Financial departments still under pressure
The end of the health crisis opens the way to a new wave of difficulties, since companies that have contracted a PGE must initiate repayments. Many structures having already lost turnover during the crisis, find themselves today pay off debts they didn’t have before. Added to this is the Russian-Ukrainian war, and with it the rise in the price of raw materials, the breakdown of supply chains and inflation around energy price.
Financial departments find themselves de facto in a dead end, caught between the debt repayments, the disruption caused by the international geopolitical situation and the growing pressure from insurers in the face of ever-increasing risk exposure. Management of invoices, Payment period and cash therefore becomes a real balancing act.
Several solutions available to Daf
Despite this alarming context, however, finance departments have several levers for action. Following the rise in credit insurance prices and the fall in guaranteed outstandings, it is indeed possible for managers to put their credit insurer in competition. This decision has little impact on the business and can be made relatively quickly. The reopening of competition by the insurer is thus likely to allow a review of its positioning and a reduction in prices. In this sense, companies have everything to gain by mobilizing internally their teams and to invest time on theoptimization of their contracts.
Also, companies with factoring financing can turn to their factor. In the cases where the financial health of the company remains solidthe factor can acceptprovide cash beyond its own risk coverage and therefore to protect more broadly the company cash flow. However, this is a solution applicable on a case-by-case basis, requiring guarantees of viability in terms of cash, more than ever sinews of war in times of turbulence.
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© Marc BERTRAND
Adrien de Rufz is Senior Manager, Asset Finance, Restructuring & Turnaround Transformation activities at KPMG France. He advises companies in setting up or renegotiating asset financing programs, particularly in factoring and securitization, in various contexts: business growth, replacement of short-term lines at lower cost and off-balance sheet, mergers/ LBO, refinancing, cash flow tensions, insolvency proceedings. He is also involved in credit insurance issues that he puts to the service of factoring in order to optimize financing.