Unless We Change Course, Today’s Credit Crisis Will Become Tomorrow’s New Liquidity Crunch

Many businesses across the country, including thousands and thousands of small businesses that form the backbone of U.S. supply chains – employing millions of Americans and supporting our retail jobs engine – are on the verge of driving off a credit cliff.

Historic revenue disruptions since March coupled with economic uncertainties for the rest of the year make it impossible for small businesses, and their financial partners, to make credit decisions. No business has an accurate gauge of cash flow so it is hard to know if the transactions we enter into today will result in payments tomorrow.

The risk that your customers will not pay is always present. In normal times, companies mitigate such risk with tools like trade credit insurance to guarantee a majority of your revenue even if your original customer cannot pay. Those guarantees have the added benefit of supporting lines of credit to get working capital.

But with enormous economic uncertainty, and mounting retail bankruptcies in the headlines, this tool is no longer available.  The TCI industry cannot provide the risk mitigation it would normally be able to offer and, as a result, many small businesses are being pushed out of our economic recovery. More than 60 percent of suppliers using TCI are small or medium-sized companies with less than $20 million in annual sales. TCI supports firms employing more than 2 million American workers, conservatively protecting $600 billion in annual U.S. sales. These findings, and others, are contained in a report the TCI industry recently published.

Congress and the executive branch have taken unprecedented actions to bridge the liquidity gap that has gripped our economy over the past few months. But this credit crunch presents a new and different challenge and, unless fixed, the measures that have saved small business over the past few months will prove to be a bridge to nowhere.

Swift federal action is needed now. Without it, the lack of commercial credit will seize up the economy, throwing millions of American workers and small businesses out of work.

Fortunately, the federal government can create a temporary backstop that would account for the increased risk caused by COVID-19, allowing the TCI industry to provide sufficient coverage again. This would be temporary and short term – no more than nine months – that in the end would not support the TCI industry, but rather the companies and industries they serve.

Canada and many European countries have already created such emergency government backstops. The United States needs to do the same – not only to help sustain the economic recovery, but to ensure that U.S. companies are not suddenly left at a competitive disadvantage with their European and Canadian counterparts. Not only does the status quo put U.S. firms in jeopardy but it does so while their European and Canadian counterparts are held harmless.

There isn’t much time to act to prevent irreversible damage to U.S. firms and their American employees. Our economy is now lurching through back to school and toward holiday seasons, the busiest time of the year for retail. Transactions that were routine in January are now considered too risky. Companies can’t ship their products and soon many retailers won’t be able to stock their shelves or their distribution centers. These lost sales mean lost revenues and lost jobs. And this is happening at the worst possible time.

Unless we change course, today’s credit crisis will become tomorrow’s new liquidity crunch for small and medium sized companies. And it will show up just in time for the holidays.


Steve Lamar is president and CEO of the American Apparel & Footwear Association, the national trade association representing more than 1,000 brands in the apparel and footwear industry.

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