Debt Collections and Covid
Covid has had a major impact on debt collectionsin the travel, restaurant and tourism related industries such as accommodations and entertainment. Many small and medium businesses have permanently closed. Besides the industries mentioned above, there are other industries that will never be the same.
Some companies on the other hand have experienced phenomenal growth, such as Zoom. Whenever the situation settles down to normalcy, or semi-normalcy, there will be permanent changes to how we conduct business, and unfortunately, massive bad debt write-offs.
Commercial office space is a good example. With Covid, many companies converted their employees into working remotely. Instead of an expected decrease in productivity, many companies were surprised by a productivity increase. As a result, some companies are looking to downsize the amount of expensive space they are leasing, or renting.
Perhaps this is the reason behind a massive increase in computer sales. The cost of equipping a home office pales when compared to the long-term costs of AAA space they no longer need. Instead of needing office space for all their employees, they can downsize and create common offices where employees can hold meetings and work onsite when necessary. The biggest incentive for companies to downsize their space is that the savings go directly to their bottom line.
Future Indicators for Debt Collection
The weird part about the Covid situation is that it isn't just limited to specific industries. Some industries are doing well, but there are niches within these industries that are getting decimated. For example: The food wholesale industry overall is in good shape. Meanwhile, the wholesale food suppliers who rely on supplying restaurants are getting pummeled.
More companies will downsize and sublet, terminate, or renew their leases for less space. This in turn will have a ripple effect on property management companies and building owners. We are already seeing an upsurge in construction related collection listings from commercial building projects that have been delayed or cancelled.
Another factor is when a key person in a company has died or had a hard case of Covid. We ran into a debtor that had Covid and it took him over four months to recover. During his recovery, his business steadily deteriorated and he is looking at a year or two to get out of his financial predicament.
In 2021 there will be a substantial number of companies holding on and rebuilding. Some will make it and some won't. Bankruptcies will also probably rise in 2021. Some companies will start liquidating and their assets will start to disappear. Key people see the writing on the wall and suddenly leave, accelerating the company's downward spiral. It will be advisable to keep a tight rein on receivables.
One major point to keep in mind in 2021 is the Covid situation is unpredictable and so is the domino effect on other industries and industry sectors. 2021 will be a very interesting year for debt collections.
