Prompt payments are the lifeline for businesses across the world; they simply need good practices to survive. A new survey indicates that North American suppliers are facing a period of poor payment practices, which is prompting a change in the way they receive and request payment.
A quarter of all B2B invoices issued by firms in the US, Mexico and Canada are past due, with this figure not set to improve anytime soon, a survey from trade credit insurance company Atradius has found.
In the US, the share of overdue invoices is highest in the metals sector at 40.4% of the total value of B2B invoices. The ICT/electronics sector follows at 33%, and the construction industry sits in third place (32%). In Canada, the ICT/electronics sector takes the top spot (34.4%) for overdue invoices and in Mexico, the risk of late payment is highest in construction (35%).
Most US firms (55%) do not expect payment practices of B2B customers to change much over the coming months, while one-third expect an increase in late payments. Only 12% anticipate an improvement.
Overall, the proportion of total B2B sales made on credit in the US rose to more than 55% this year, up from than 43.6% in 2016 and 44.6% last year.
Proportion of total B2B sales made on credit in the US (%)
GTR speaks to David Huey, Atradius’ regional director for the US, Canada and Mexico, to find out exactly how North American payment practices are faring.
GTR: What is your view on North American payment practices?
Huey: We’re currently seeing a deterioration in payment practices and we’re predicting a surge in payment delays throughout the rest of 2019.
It’s important to note that late or uncollectable payment has a ripple effect. If a company is experiencing liquidity issues because of its customer’s inability to pay on time or at all, it will often in turn pay invoices to their own suppliers late, moving the problem down the supply chain.
Smaller companies are especially susceptible to this risk. We found that small firms in the US reported writing off 2% of their B2B invoices as uncollectable – a higher percentage than larger firms.
GTR: What’s behind the deterioration?
Huey: Three interrelated factors: a rise in insolvencies after a decade of decreases, changing international trade policy and the slowdown of the global economy.
An increase in insolvencies acts similarly to a virus, putting businesses in the entire supply chain ecosystem at risk. This increase in insolvencies is closely linked to trade policy, as there’s currently a lot of uncertainty regarding the fate of the United States-Mexico-Canada Agreement (USMCA) agreement.
In addition, to casting a dark cloud over the insolvency outlook, trade policy changes are putting a heavy strain on global trade, exposing North American businesses to a heightened payment default risk.
GTR: How is the deterioration in payment practices changing the way North American companies request payment?
Huey: In response to a heightened perception of the payment default risk from trading on credit, businesses in the US and Mexico are requesting quicker payment of invoices than one year ago. In the US, businesses are asking to be paid in an average of 24 days (down from 27 in 2018). In Mexico, the average payment time has decreased a full week, from 33 to 26 days.
Cash is viewed as safer than payment by credit, which is perhaps why a large percentage of businesses (51% in the US, 63% in Mexico and 39% in Canada) are planning to more frequently request payment in cash from B2B customers.
Additional protection methods are on the rise among North American businesses, as well. These include outsourcing the collection of past due invoices and offering discounts for early settlement of invoices.
GTR: So, what’s been the impact on trade finance?
Huey: Companies are attempting to manage their credit by checking buyers’ creditworthiness prior to trade agreements and reserving against bad debts. Just under a third of companies in the US take measures to manage liquidity issues caused by late payments and reduce financial pressure. One-quarter also report needing additional financing from external sources.
As always, effectively managing payment defaults is one of the keys to business longevity. In this regard, credit insurance remains the most effective tool for securely building a business.