Risk trends
Threats contributing to an increasingly complex risk landscape
Customer default or insolvency can originate from various factors. The current economic environment is marked by high complexity and multiple uncertainties that are constantly shifting the risk landscape. This can result in cash flow issues that may impede or delay payment. Issues that businesses are contending with, include:
Supply chain disruptions
Commerce is often heavily reliant on complex supply chains that span the globe. However, recent disruptions have highlighted the fragility of these networks. The COVID-19 pandemic and various geopolitical tensions have exposed weaknesses in supply chain management, leading to delays, stockouts, and increased costs. Businesses must navigate tariffs, import restrictions, and fluctuating shipping costs, all of which can impact profitability.
Inflated energy prices
The vulnerability of European energy systems has been exposed in recent years, prompting countries to revise their energy strategies. Following the beginning of the Russia-Ukraine conflict, European energy and power markets have suffered a market shock as demand exceeded supply. This has had a deleterious effect on many business models within the UK, particularly those with high energy consumption and low profit margins.
Reduction in disposable income of consumers
Low consumer confidence has weakened demand in various consumer-focussed industries. This has primarily occurred due to a cost-of-living crisis that has resulted in a vast reduction in disposable income. Additionally, behavioural patterns have changed, the emergence of sustainability as a critical concern for consumers is a key example of this.
Increased borrowing costs
For the foreseeable future, it is likely businesses will continue to face further barriers in accessing capital. Although interest rates have been reduced, and the Bank of England appears to be in a cutting cycle, borrowing rates and inflation may remain elevated. A reduction in credit can thwart strategic growth plans, as well as, limit ability to settle bills.
Disruption of international trade
Trading internationally may invite novel risks. Global commerce is inherently vulnerable to the actions of foreign governments, such as tariffs, war, trade embargoes, or political instability. Current geopolitical issues are already making trade difficult and debts harder to recover. The effect of these can be crippling, and this threat should be considered particularly if operations are intensified in one region, or if a large share of revenues are generated abroad.