We have been experiencing one of the longest economic recoveries in recent history surpassed only by the 106 month recovery in the 1960’s and the 120 month recovery in the 1990’s. Odds are this recovery will not last too much longer and it may be wise to review your accounts receivable and outstanding credits now to minimize future losses.
The economy took a major dive in 2008 with the burst of the bubble related to mortgage securitizations. At that time total household debt in the United States had reached a peak of $12.68 trillion. Credit restrictions were tightened and consumer thirst for debt waned. From the second half of 2008 through early 2013 the amount of household debt decreased by nearly $1 trillion. Since then household debt has been on the increase. At the end of the first quarter of 2017 household debt surpassed the past high in 2008 clocking in at $12.73 trillion. This in and of itself is no reason to panic as household debt tends to increase as our economy increases; however, it may be a reason to review your outstanding accounts receivable and your credit underwriting policies and practices to tighten those up.
The amount of outstanding consumer debt bears a direct relationship to the number of defaults in payment of debt and to the number of bankruptcies that are filed. It does not take a major leap of faith to accept that consumers’ and companies’ ability to pay is affected by the debt burden that they need to service. Bankruptcy filings historically lag household debt increases by approximately 2 years. Although the outstanding household debt reached its peak in 2008 bankruptcies continue to increase until 2010 as the tighter credit worked its way through our financial system. Beginning in 2010 the number of bankruptcies both consumer and business have dropped on an annual basis. By 2016 the number of bankruptcy filings was about half of those filed in 2010. It is predicted that 2017 will show an increase in corporate bankruptcy filings and a moderate increase in consumer bankruptcy filings. This is slightly behind the historic 2 year lag.
Based on all of the foregoing you may want to be proactive by tightening your credit policies and managing your accounts receivable to minimize your exposure to credit risk. As my Grandmother used to say “the first hog to the trough gets the slop” (you do not want to be the last creditor in line).
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