The Potential Effects of Low Unemployment Numbers on Creditors and Debt Collection

11 Mar

New unemployment numbers have been released recently, touting that the U.S. economy added 295,000 jobs in February. This crushed expectations, which most experts estimated to be between 200,000 – 250,000. These numbers also mean the American unemployment rate is the lowest since May, 2008, before the massive financial crisis crippled America for years.

chart jobs report 030615Now, this all sounds like great news: the American economy is growing, people are getting back to work, more money is flowing between businesses and consumers, etc. But how does this all trickle down to individual businesses and their ability to pay off their debt and accounts payable?

For starters, a lower unemployment rate means more people are working because businesses are growing and need more workers. When businesses grow, their revenues increase and they have more money with which to expand, invest, and obviously pay back their debt.

So initially, this sounds great for all those businesses who are waiting for their accounts receivables to finally come in. They sold a particular business goods on account, trusting that they would be paid at a later date. With this increased revenue, businesses around the country should have the cash on hand to make good on their past debts and balance their books. Many creditors are happy now, and the debt collection business just became a bit easier.

However, this may only be temporary. What we’ve seen at times in the past is a large resurgence of debts being paid, with businesses finally balancing their books. Their business is growing, so they buy more goods from creditors and hire more employees to handle the load. What can happen, though, is that some businesses do not forecast their needs appropriately and tend to buy and hire more than necessary.

The business anticipates additional growth so they double their current goods orders and hire 3 or 4 new employees. But maybe their business doesn’t grow as expected – they hired more workers and bought more goods, but have no need for them in the end. Who gets left holding the check? The new hires, who will be once again unemployed within a few months, and the creditor who sold them the goods on account.

So sure, low unemployment numbers can be great – but just don’t let your customers get too ahead of themselves. Diligence is key when investigating new customers or considering an increase in a customer’s credit line. For new customer tips, check out our New Customer Best Practices blog post!

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