I started writing this blog post a couple weeks ago. At the time, tourists were enjoying gelato at the Trevi Fountain. Today Italy is in a self-imposed national lockdown – isolated from the rest of Europe to contain the spread of COVID-19; the novel coronavirus. Italy is more or less offline for the time being. What’s happening to debt, like mortgages in Italy? How do people keep their financial obligations if they can’t leave the house to work? Italy’s solution is to freeze mortgages. Mortgage traffic simply stops for the duration of the national quarantine. And nobody knows how that’s going to turn out. File that under “wait and see.”
Closer to home, sports fans are on a cold-turkey diet, with the NHL, NBA and MLB suspending their seasons within a day of each other. Ontario school kids are getting a two-week extension of spring break. Family schedules, daycare and transportation costs are going to pinch at a time when work itself might be in jeopardy. Still, we must remind ourselves that those are just inconveniences compared to a pandemic worst-case-scenario.
The original version of this blog post started with the question, “What would it take for the Bank of Canada to make a half-percent cut in one day?” COVID-19 and an oil production war between Russia and Saudi Arabia are pieces of the answer—leading to two rate cuts since the start of the month.
Just a weeks ago the European Central bank said it was focused on the COVID-19 risk to economies and markets. Central banks are interested in a different kind of virus: debt. The European Chamber of Commerce surveyed its members. 90% say they’re feeling a medium to high impact from the coronavirus outbreak. Half expect business to drop by 10%, and a quarter expect business to drop by 20%. The recovery time-frame is YEARS.
Six months ago the worst business news on offer was Boeing’s problems fixing the 737-800 MAX. It affected air travel because the entire industry was suddenly over capacity for seats. Now rather than worries about not enough airline capacity, the situation has flipped to so much excess capacity that airlines are flying empty planes to retain access to lucrative routes. Airlines are huge customers to maintenance, food and beverage, and fuel suppliers. That’s just one industry. Everyone will be affected by COVID-19.
One-third of the world’s manufacturing capacity remains in China. While production and shipping is slowly returning to normal, vendors and customers are scrambling to redraw global supply lines. Distributors have worries because supply contracts are in flux — the effects and ripples will hit in weeks or months. It’s an acute problem with lasting effects.
The pipeline protests and rail blockades of a few weeks ago barely make the paper anymore, let alone the front page. Even so, “Canada runs on rails,” is as true today as it was when they drove the last spike in Craigallache, BC. Slowing rail traffic does the same to the Canadian economy. It’s an issue, but from a business perspective it couldn’t have come at a worse time. Investment fears will linger for years.
The debt bubble I’ve been warning about is rearing its head. Half of Canadian consumers are $200 away from missing bills every month while taxes and government fees are on the rise due to austerity. An increase in property taxes will be enough to push some households into negative cash flow. The consumer debt crisis is persistent, and deepening. This isn’t a years-long issue. This one is deeply engrained. And it affects every business in Canada.
If any one of these events happened five years ago, we should have been shocked; things have been stable and good for such a long time.
Today, the world outside my window shows a lot of negative potential: coronavirus, the resulting global economic slowdown, low interest rates, and a debt bubble. None of it is going away soon, and none of it is in anyone’s control.
But you ARE in control of something: your business.
At MetCredit we have an elaborate pandemic plan to ensure business continuity across all our offices. You probably don’t need anything like that, but make sure you have way to operate when people need to work remotely, or need time off.
Plan to keep your workplace safe, through handwashing and by regularly sanitizing shared touch points. Maximize space between desks, and be respectful of employee’s concerns.
It’s also an opportunity to create new options to customers. Give them ways to buy and pay without coming to your locations, and reduce the chances of transmitting a virus on the products you sell, as well as card readers and pens. The more you reduce anxiety and keep customers healthy, the safer your business will be.
In terms of cash flow, you probably don’t have to lay people off yet. Take stock of the cash flow landscape and reach for the low-hanging fruit — like your accounts receivable.
Receivables are your second most liquid asset after cash on hand. Now more than ever, as soon as payment is overdue, contact the customer and ask for payment. If they don’t pay promptly (or worse, refuse to answer your call), go straight to your collection agency. In collections, it comes down to statistics: the longer a debt languishes in a pile of outstanding receivables, the less it’s worth. Old debt is worth a fraction of new debt. You can see how much you’re potentially leaving on the table with the MetCredit Debt Recovery Calculator.
Bad debt is NOT a cost of doing business. It’s the cost of NOT doing business right. The best practice to avoid waking in cold sweats with necrotizing debt gnawing away at your bottom line.
Contact my team now, and we’ll do everything we can to boost your business’ immunity to debt.
You may not be able to solve all the world’s problems, but focus on the things you CAN do. We’ll weather this together, and come out the other end stronger.
