Credit Matters Blog

Global Liquidity - How Will It Affect Your Business?

Kim Radok 19 January 2016


The micro or SME business person will often see in the media the commentary about 2016 being a year of economic turbulence and of global liquidity. As they may not deal with global or large corporate customers, the relevance of these factors to their business can be underrated. Alternatively, as their business only sells on a cash basis why worry about these factors?

As is the case with larger business enterprises, such factors will have an impact. Irrespective of where your business is located or which industry group you belong, evidence suggests liquidity will be an issue for you this year.

I suggest the main factors causing the current lack of local and global liquidity are as follows.

1 The effects of the GFC eight years ago have not been resolved and massive amounts debt remain hidden. Naturally, the funds available for buying are restricted by the payments required to clear this mound of debt.

2 The costs of doing business have increased substantially due to Government and Legislative rules and regulations after the GFC and changing community expectations. Operating a business in every country will never be a simple or as inexpensive as it was in the past.

3 Paternalistic Governments and Legislators, have created new rules and regulations, which often protect debtors unfairly to the disadvantage of creditors. Funds which should have been available for new purchases or dividends to owners are lost to protect creditor rights and chasing slow paying customers and bad debts.

4 The "entitlement society which covers both consumers and business enterprises" believe they have the right to avoid their responsibilities when obtaining credit. We have already seen the consequence of this new behavioural mindset as business credit is no longer available for certain classes of customers. When credit is available, it is increasingly expensive.

5 Almost daily we now see media stories about the major impacts on the business community due to lost cashflow, stock and property damage due to theft or fraud. These stories reinforce the words of criminologists that when times are tough financially, people turn to crime, drugs and gambling to survive.

6 Large areas of the world are now subjected to war with the associated costs of war and loss of trading opportunities.

7 The current stock-market panic selling and associated issues, will deprive many investors of their cash and ability to pay already committed borrowings. This will be a further drain on the business community as bad debts and cashflow problems will become evident in time.

8 In times of economic turbulence, those with cash tend to hoard it rather than to spend on consumer goods or invest in business opportunities.

9 The banks are reducing all inexpensive lending to micro and SME enterprises, unless security is available. Credit is therefore less available or more expensive.

At the end of the day, these causes, whilst not significant on their own, all add up to suggest global liquidity will be tight this year. In this environment, those enterprises which offer B2B credit, will all be most at risk. Managing credit and risk factors will be extremely important in 2016 irrespective of the size of your business or where it is located.