Is Inflation Bad for Creditors?

by cabadministrator

inflation

How High Inflation Rates
Impact Commercial Debt Collection


With U.S. inflation higher than it’s been in more than 40 years, creditors are wondering what the effect will be.

If the nature of your business includes extending commercial credit, you may be concerned about how rampant inflation will affect your ability to collect payments.

The Down Side

Inflation troubles creditors for two primary reasons:

  1. During periods of high inflation, the value of currency declines over time. So the money creditors receive from their clients has less value than the money they lent. In other words, cash now is worth more than cash later.
  2. The higher cost of basic necessities will result in more consumers defaulting on their debts. The commercial businesses who rely on those consumers could then end up defaulting on their own financial obligations.

As the inflation rate climbs, any company that relies heavily on purchased goods can take a hit to their bottom line. In addition, rising fuel and energy prices can significantly increase both direct and indirect costs for all kinds of businesses.

Countries with
Highest Inflation

  1. Venezuela — 284.4%
  2. Sudan — 260.2%
  3. Lebanon — 208.1%
  4. Syria — 139.0%
  5. Zimbabwe — 96.4%
  6. Suriname — 61.5%
  7. Turkey — 61.1%
  8. Argentina — 55.1%
  9. Iran — 34.7%
  10. Ethiopia — 34.7%

Source: Trading Economics

Of course, companies severely affected by inflationary factors can choose to increase their own prices in order to compensate for increased costs. But there’s a limit to how much consumers are prepared to pay. So reduced sales and increased strain on business finances could be the end result.

The Up Side

However, high inflation can actually benefit creditors in some ways.

For example, more consumers will seek credit to buy big-ticket items because of the higher prices. So creditors can expect more new customers. Another plus: these higher-priced items will earn more interest for the creditor.

Also, during high inflationary periods, consumers may request more time to pay off their debts. Creditors who extend payment periods can collect additional interest.

Responding to High Inflation

Are you worried about your ability to collect commercial debt because of high inflation? Here are a few suggestions for reducing risk:

Not Always a
Bad Thing

A commonly held misconception is that inflation always harms everyone financially. But a small and predictable rate of inflation offers a hedge against deflation and therefore is generally considered acceptable (even good).

That’s because if the inflation rate runs too close to zero, there’s an increased risk of negative inflation. And negative inflation increases the threat of deflation – often resulting in economic recession or depression.

 

  • Maintain close contact with your commercial customers who are in danger of default. This will help them identify your business as a priority creditor.
  • Optimize your invoicing process to ensure you’re not lagging behind. Timely invoicing will help minimize cash flow issues. You may also consider shortening the payment window to 14 days, especially for electronic transactions.
  • Be willing to extend payment periods. Flexibility is key during times of economic uncertainty.
  • Surging inflation heightens the risk default, as companies under financial pressure may be tempted to aid their cash flow by delaying payment to suppliers. So now may be a good time to retain a commercial collection firm.

Partner with CAB

If inflation continues and the economic situation worsens, many businesses will be at greater risk of default. As a result, you may need to consider taking matters to the next level through legal action.

When you partner with CAB, our unique combination of law firm and commercial collection agency means you’ll have the right collection professionals in your corner to keep cash will flowing.


Sources:
Featured Image: Adobe, License Granted
Khan Academy
Christian Science Monitor
Xero

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