5 Credit Risk Trends to Watch in 2023


There’s something about the start of a new year that makes people and businesses reminisce about the previous year and predict what’s to come in the new year.

If you read the news (as most of us do), you’ll see that a lot of people are talking about climate change, COVID-19, rising inflation, supply chain disruptions when discussing business growth and risk management that businesses will face in 2023.

But there are other credit risk trends that aren’t getting enough attention. So, I caught up with credit risk management experts from Credit Research Foundation, Quadient, Gatekeeper, Credit Today and Creditsafe to get their take on the most important trends, why they matter and what businesses should be doing to address them in 2023.

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1: Traditionally outsourced activities will return in-house

Everyone’s talking about the financial markets and the economic downturn – and how businesses will struggle amidst uncertainty this year. But according to Matt Skudera, President and COO of Credit Research Foundation, there’s an important credit risk trend that businesses should be focusing on in 2023 – bringing operations back in-house for organizations that maintain or have traditional outsourcing relationships with third party vendors.

Outsourcing operations

As Matt Skudera explains, “The trend that started in 2022 and what I see as continuing in 2023 is to bring those arm’s length operations back in-house by creating ‘captive’ environments on a global scale.  The key will be to bring those traditionally outsourced operations back to the businesses and under their umbrella in a location that remains financially and operationally advantageous to the business.

“Whether a business decides to bring certain operations back in-house or continue with outsourcing is, of course, up to each business and will depend on several factors. But all businesses have overarching priorities to grow their business, which include improving operational stability (COVID-19 lessons), the development of better controls, a vested success rate that’s higher in this environment and the ability to pivot business models based on market demand and customer needs. The fact is that customer engagement has become more of a priority than simply saving on operational costs.

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2: Financial/accounting talent will be harder to recruit and retain

A recent article in CNBC proclaimed, “If there was any hope during the height of the COVID-19 pandemic that the workplace would one day ‘return to normal’, 2022 dashed that expectation.” Those words couldn’t be truer. Over the last 12 months, we’ve seen a trend of mass layoffs at companies in the tech sector, including Google, Microsoft and Twitter. And things aren’t looking so great in 2023, with more than 58,000 workers in US-based tech companies being laid off in mass layoffs so far in 2023, according to a Crunchbase News tally. That number includes IBM’s 3,900-person cut and SAP’s 3,000-person layoff announcements. And we still have 11 more months to get through. With all these layoffs, you’d think it was impossible to have a labor shortage. But that’s not the case.

According to Sarah-Jayne Martin, Director of Financial Automation at Quadient, the financial/accounting industry will be hit especially hard with a labor shortage in 2023 due in large part to the fact that fewer college graduates are entering this field and the existing workforce of finance/accounting professionals are hitting retirement age.

As Sarah-Jayne Martin explains, “Not only does this mean that critical institutional knowledge will be lost, but accounting departments will be forced to do more with less in terms of manpower. While the finance/accounting function itself cannot be fully turned over to AI, accounting departments must leverage automation and digital transformation if they want to stay nimble, while also being efficient and effective in helping their companies grow and protecting them from financial risks. When you combine this challenge with the ‘The Great Resignation’ and ‘The Quiet Resignation,’ I expect many American companies will struggle to find and retain top financial/risk management talent.

Older finance professionals

This is especially important as both the functions of credit risk management and payment collection could negatively suffer and hurt a company’s bottom line. Meanwhile, a lot of businesses are still using old-school spreadsheets and other manual tracking activities to manage their company’s invoices and cash flow. The finance/accounting industry is one of those industries that has struggled to adapt to and embed new technologies into its financial processes. But this must happen now because clutching onto outdated, manual processes and systems is a surefire recipe for more errors and lost revenue.

I don’t think this topic is being discussed much mostly because it feels like a slow change or something far off in the distant future when there are much bigger, pressing matters at hand, such as an imminent recession or supply chain issues. But a significant reduction in accounting personnel will certainly accelerate the need to invest in technology to help close the labor gaps.

Businesses (and finance/credit risk teams, in particular) need to start tackling digital transformation now to get ahead of this worrying trend. Determining where their processes can be automated is only the first step. They will then need to research available solutions, assess which ones are ultimately effective for them and then go through the implementation and change management process. As we all know, the execution of onboarding new technologies can take time and expose pitfalls in current processes. And in some cases, it may require an overall rehaul of existing business practices. So, the sooner businesses start this process, the better.”

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3: Diversifying vendors will reduce credit risk

US inflation soared in 2022 due to several factors, including the effects of the pandemic, the cost of living crisis, rising energy prices, supply chain interruptions and the Ukrainian war, just to name a few. According to US Labor Department data published on January 12, 2023, the annual inflation rate for the United States was 6.5% for the 12 months ending December 2022.

According to Daniel Barnes, Community Manager at Gatekeeper, rising inflation rates throughout 2022 have caused significant damage to supply chains that still haven’t recovered from the effects of the COVID-19 pandemic. In turn, the global supply chains that had been so reliant since the post-World War II era are now more unstable than ever. 

As Daniel Barnes explains, “With the impact of global supply chains affecting everyone, from consumers to businesses, we need to evaluate the credit risk of existing suppliers across the globe. We’ll likely see a continuation of some early indicators that businesses are looking to build resilience into their supply chain. A key step to building that resilience will be to diversify their vendors and move away from potentially global vendors to favor nearshoring and reshoring their existing vendor base. 

A report by Capterra found that 88% of the 300 small companies it surveyed would use vendors closer to home in 2023. This trend will likely be followed in every category (except perhaps SaaS and the broader software category).”

When you look at what Daniel is saying here, it makes perfect sense. But I can’t help but wonder why it’s not being talked about so much right now. Daniel Barnes thinks this has to do with the fact that the interconnectedness of global supply chains is often referred to on a macro level. “Under that, we have a global web of contracts that underpin those vendor relationships. If there’s any weakness in either the vendor's financial health or poor contractual terms around payments that could hurt cash flow, we will see vendors struggle to provide the goods and services we require.”

Diversifying vendors

Daniel has three specific recommendations for how businesses can get ahead of these challenges and diversify their vendors to see positive results in terms of financial stability and revenue growth.

  • Create a digital vendor onboarding process that automates checks around finance and data security risks. Build specific due diligence questions related to your organization's risk tolerance and ensure your entire business is involved, informed and trained on this process.
  • Continuously monitor the financial health of your vendors. Don’t just run a credit check on your vendors once and then never go back to it. You need to monitor your vendors’ financial health regularly because circumstances will change, as we’re already seeing with the economic downturn. You need to be prepared for when their financial health drops (i.e. credit score falls in a short period of time, a lower credit limit is available, they have a high number and amount of money past due to suppliers and they pay their suppliers late frequently). My preference would be to have continuous monitoring aligned with an automated risk mitigation process. This would be a digital process.
  • Maintain a digital risk register that keeps track of any live risks within your vendor base. These risks can be identified throughout the sourcing, onboarding, contracting (pre-signature) and post-signature contract management phases of the vendor lifecycle. 
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4: Resilience is key for recession-proofing businesses

Debt is part and parcel of running a business. But how businesses handle their debt (and the challenges that come with it) can drastically influence which companies weather the storm and which ones drown. This is something that Gerard Dugdill, Publishing Director of Credit Today, knows all too well. He strongly believes that resilience will be key to recession-proofing businesses.

As Gerard Dugdill explains, “It’s important for businesses to not get stuck in the mindset of how they got there, but instead to focus on sending out the right signals to the marketplace, being proactive and forward-thinking and, most importantly, to be prepared to prove statistically that their business is heading in the right direction towards sustainable financial growth. Make data your best friend so you can really understand how your business is performing (i.e. assets, liabilities, revenue, profit) and forecast how you’ll grow the business year after year.

Talk the talk, show that you won’t be at the beckon call of external controlling factors. Take arms against a sea of troubles and fully account for how you’ll recover from your challenges and losses to whip your business into good shape moving forward.”

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5: With US retail bankruptcies on the rise, lenders should prioritize financial health and payment data

You can’t escape news headlines about the spate of US retail bankruptcies – from Bed Bath & Beyond and Party City to Serta Simmons Bedding and many more. But filing for bankruptcy is a process that takes time, so many of these companies still need a capital infusion to be able to stay afloat to make it through the bankruptcy process. That's where lenders come in – they've got the money that these cash-strapped retailers desperately need.

But getting money from lenders is far from a sure thing, even if you’re a big-name brand like Bed Bath & Beyond. Lenders should be considering several factors before deciding if it’s ‘worthwhile’ to approve them for a loan. For example, they should be looking at how much profit the company has been generating. But one of the more important factors lenders should be considering is if the struggling company can make loan repayments alongside all its other financial expenses. This is where I’d suspect lenders will first look at the business credit report to understand the company’s payment behaviors. Do they pay their suppliers on time? If they have late payments, how long does it typically take them to pay? If it’s more than 7 days past their payment terms due date, then that should give lenders cause for concern.

Bed Bath & Beyond

With Bed Bath & Beyond being at the center of bankruptcy news stories this month, Matthew Debbage, CEO of the Americas and Asia for Creditsafe, was particularly concerned about the latest news that the home goods retailer has defaulted on loans.

As Matthew Debbage explains, “I hate to say it, but it looks like the only real option left is filing for bankruptcy. Unfortunately, a lot of the damage has already been done – Bed Bath & Beyond Inc. shares plummeted more than 20% and were halted last week. This isn’t surprising since our data shows that Bed Bath & Beyond Inc. has 18 UCC filings against it, with the latest one filed in June 2022. UCC filings allow lenders to seize listed property as a way of recouping loan funds in case a borrower defaults. And we know that Bed Bath & Beyond is in default. I imagine the retailer will be holding liquidation sales nationwide and begin the process of mass store closures. The first stores to go will likely be the ones with high operating costs and low revenue growth.”

Retailers going bankrupt

Of course, other retailers have fallen on hard times and are in the grips of bankruptcy, like Serta Simmons Bedding and Party City. With Serta Simmons Bedding, Matthew points out that it’s a bit of a unique situation compared to other retailers. ”Mattresses are considered big-ticket items with higher price tags. With rising inflation and the cost-of-living crisis not showing any signs of easing up, we’re moving into a new era of ‘intentional spending.’ So, American consumers have become a lot more discerning about what they spend their money on and only buying things they truly need. So, while ‘value’ once might have been related to factors like price and convenience, the definition of ‘value’ is much different right now. American consumers are only spending money on things they really need.

When you think about how the recession has impacted American consumer spending and then you look at the types of products that Serta Simmons Bedding sells and the high price points, it’s not hard to see why they filed for bankruptcy. As consumer spending has dropped, mattresses are likely to be one of the last things people will spend their money on. They’re more likely to postpone upgrading their existing mattress and use that money to pay necessary bills for rent/mortgage, utilities, internet/phone and loans.

These factors likely put a strain on Serta Simmons Bedding’s cash flow. With less sales coming in and potentially more cash going out (repaying the $200 million loan it received in 2020 as part of a refinancing agreement to stay afloat during the pandemic), the mattress manufacturer didn’t have much choice but to file for bankruptcy. But our credit risk data shows that the company is slowly but surely rebuilding its financial health. While its average DBT (days beyond terms) fluctuated between 7 and 11 days over the course of 2022, it was much lower than the average DBT (between 9 and 11 days) in the furniture and home furnishings industry for most of the year. This could be seen as a positive sign by its lenders (old and new) that Serta Simmons Bedding will be able to repay its loans in a timely manner.”

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