Throughout the global recession, businesses across the world have been impacted by late payments or worse payment defaults to varying degrees. Despite the well publicised impact in countries like Ireland, Spain, The UK, the United States and most recently Greece these are not the only countries and in some ways, not the countries where the broadest swath of the economy has been impacted. For these markets, the heart of the problem has centred around overextension of credit in the housing markets by the financial services sector and has spread from there to autos and consumer durables. Basically products that frequently involve financing when purchased.
However, the impact, most noticeably on the financial system has found its way into other segments of the economy and put pressure on businesses across the world, particularly those who rely on financing and the patronage of consumers in the impacted markets.
According to the Atradius Payment Practices Barometer, a twice yearly study of payment behaviour in B2B transactions, which reviewed payment management issues of approximately 4,000 business in 22 countries and sovereign states across the world, even businesses in countries that had never slid into recession like China and Poland suffered severe impacts due largely to the challenges of working with customers in markets that were in a recession. Late payments or worse, payment defaults, were creating a range of issues for suppliers in respect to managing the financial health of their own businesses. For about 19% of the businesses surveyed across 16 European countries, this resulted in rising DSOs, most notably in Italy, Austria, the Czech Republic and Hungary. This compared to 12% of the respondents experiencing falling DSOs with Great Britain and France showing the greatest probability of a decrease versus an increase.
This impact however stretches further than simply on DSO. Businesses have had to take actions to protect their financial strength. In some cases, those actions may have been late or insufficient resulting in more severe impacts on their business or reputation. The most frequently observed impacts were that survey respondents needed to take specific measures to correct their cash flow and that they had to postpone their own payments to their suppliers. Some of Europe’s biggest economies, Great Britain, France, Spain and Italy appear to have experienced a wider breadth of respondents being impacted while Northern and Eastern European economies, where a larger percentage of sales were made on credit, tended to have been impacted to a lesser degree.
To stay ahead of these issues businesses generally apply a range of credit management practices including, among other things, adjusting payment terms, reminding debtors that an invoice is coming due, adjusting the amount of down payments, credit checks and credit insurance. Most businesses made no change in their use of any individual practice, but overall the chances that a respondent increased their use of a practice was about 4.5 times greater than the chances that they decreased their use. Dunning – customer reminders that an outstanding invoice is coming due – was the practice, the use of which was most frequently increased by respondents. Respondents were 8 times more likely to increase than decrease their use of dunning. It is the only practice that respondents from Europe made use of more frequently than respondents from the countries outside of Europe.
While no one practice is a panacea for all credit risks, a combination of practices can improve success. This tended to be the practice of the majority of respondents.
Atradius is a leading global provider of credit insurance and surety solutions for B2B transactions with a presence in 40 countries across the world. Credit insurance is a credit management tool that provides businesses with protection against the risk that their customers default on payment when purchasing products or services on credit.