Economic factors and the rise in insolvencies
Changes in the area of credit management are closely linked to economic developments. From the 80s, the number of business insolvencies in France began to increase, a phenomenon that our expert has observed closely. When I started at Moulinex in 1983, there were 23,000 failing companies in France. In 2008, there were almost 73,000 companies in bankruptcy.
This tripling of corporate insolvencies is a sign of the profound upheavals that the French economy is going through, particularly with the emergence of crises such as the subprime crisis in 2008. This explosion in delinquencies has forced significant adjustments in credit management practices to minimize the risk of customer insolvency.
The LME law: a decisive turning point
Another major change was the introduction of the Law for the Modernisation of the Economy (LME) in 2008, which introduced maximum payment terms for the first time in France. Before this law, it was not uncommon to see companies operating with payment terms of 90 or even 120 days. The LME limited these deadlines to a maximum of 60 days (or 45 days at the end of the month), which disrupted the practices of companies, particularly in sectors such as construction where long delays were the norm. At the time, there were delays in France of 90 days of payment, 120 days. And then, all of a sudden, we reduced it to a maximum of 60 days and 45 days at the end of the month.
The subprime crisis and its repercussions
At the same time as the LME law was adopted, the subprime crisis hit the financial markets hard, restricting access to credit for companies. Banks, faced with the crisis, tightened the conditions for granting credit, forcing companies to adapt.
Faced with this situation, French companies, which are often undercapitalised, have had to turn more to inter-company credit, which at the time represented twice as much as short-term bank loans. This trend has led to a transformation in the way accounts receivable risk is managed.
The "Just on time" cash culture
Another aspect of the evolution of credit management lies in the cash culture. For a long time, the balance sheet (cash flow and accounts receivable) was neglected in French finance, where turnover and margin were favored as indicators of success, in a context where it was easy to borrow with interest rates close to 0% while waiting for customers to pay us. However, as access to finance became more difficult, companies had to rethink the way they managed their cash flow. The ability to transform the margin into cash was not an issue, since we had recourse to short-term bank credit. Now, it's a central issue.
"Just on time" cash management, where every euro of cash is used in an optimized way, has become a necessity in many companies. However, this transformation has not yet affected all companies, particularly in France, where many are still lagging behind in the adoption of these practices.
Post-Covid: getting back to known standards
The Covid-19 pandemic has also marked a turning point in the management of loans. After a period of uncertainty, companies are gradually returning to the management practices known before the crisis. However, lessons learned from recent events, including the importance of cash, continue to shape corporate behavior. When we come out of Covid, everything comes back a little bit... We are not worse than at the beginning of the crisis, but we are returning to the standards we knew before.
Conclusion
This second episode highlights the external forces that have shaped the evolution of credit management in France, with economic crises and legislative reforms that have forced companies to rethink the way they manage risk and cash flow. These are essential lessons for today's economic actors, who must continue to adapt to an ever-changing environment.
Stay tuned! This series continues in the coming weeks, where Scarlett will discuss the major developments in credit management, current challenges and the impact of new technologies on the industry.