Retail Trade Groups Warn That a Looming Credit Crisis Could Stall Economic Recovery

Many retailers are turning to the government for help as a looming credit crisis threatens to stall the recovery of businesses and the United States economy.

In a statement today, the American Apparel and Footwear Association called on federal leaders to provide a financing guarantee as businesses run out of cash and struggle to obtain credit. It cited a new report on trade credit insurance, which protects sellers of goods and services against the risk of non-payment due to customer insolvency, political events or unforeseen events.

According to the report, which was published by economists Dr. Robert Litan and Dr. Yong Xu, a government-sponsored backstop could help cushion the economic fallout caused by the coronavirus pandemic. It found that TCI policies supported about $600 billion in annual U.S. sales in 2019 and that 60% of suppliers using TCI are small- to medium- sized companies with less than $20 million in yearly revenues.

The researchers added that the TCI industry has reduced coverage by nearly 14% since the end of last year, and another cutback could inhibit supplier production by roughly $46 billion and the hiring of 155,000 American workers.

“For weeks we have been ringing the alarm bells about the looming credit crisis that slows down our economic recovery, and this report echoes this conclusion,” said AAFA president and CEO Steve Lamar. “Credit insurance is essential for apparel and footwear businesses to support manufacturing and limit overall risk, which is especially important now given the liquidity squeeze and cash flow uncertainty we are seeing.”

Since it touched down in the U.S. in mid-March, the COVID-19 outbreak led to supply chain disruptions, impeding manufacturing and foot traffic to stores. Despite the White House’s stimulus measures, many retailers’ balance sheets have taken a significant hit. What’s more, companies are now finding different credit terms than prior to the pandemic as insurers scale back their coverage and services to avoid risk in today’s economy.

Last month, the AAFA — which represents more than 1,000 companies across the United States — penned a letter to the Federal Reserve and the Department of Treasury. It urged Fed chairman Jerome Powell and Treasury Secretary Steven Mnuchin to structure credit insurance backstops in such a way that fashion, footwear and accessories companies can continue to access necessary funds during the pandemic.

Since then, joint letters signed by multiple industry associations had been sent to the Trump administration on June 23 and July 1.

“The federal government must take action today to make sure credit markets are fully functioning throughout the crucially important holiday season,” Lamar added in today’s statement. “Credit means we can take orders and ship goods, which allows us to keep our store shelves stocked and our workers employed. Without credit, the jobs engine that supports one in four American workers seizes up just as we enter what should be the busiest time of the year.”

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