Survey findings for Hong Kong
Modest increase in B2B credit sales, particularly in the domestic market
Hong Kong has suffered from far fewer infections than many other territories, although industry – especially tourism and retail – have been hit hard. Responses to our survey reflect an economy that was already in recession, caused by many months of social unrests, increased US-China trade quotas, and the impact (albeit not yet fully realised) of the pandemic.
Despite such difficult times for the economy, responses to the survey point to a modest increase in the percentage of B2B sales made on credit. Interestingly, the 3% increase in credit sales (an average of 60% versus 57% last year), corresponds exactly with a 3% decrease in cash sales (40% vs 43% in 2019), suggesting that many B2B sales previously made in cash last year have moved to credit transactions this year.
Hong Kong businesses strengthened their credit risk management processes in order to better handle the risk of liquidity constraints from customers.
This move towards an increase in credit sales could be caused by cash flow issues in Hong Kong’s economy with B2B buyers needing suppliers to fill a gap in short-term trade financing. However, the modest increase in the use of trade credit may be the result of Hong Kong respondents’ strong focus on insurance and credit control (see below in this report). This is not surprising considering that this small, open economy is deeply intertwined in global supply chains and trade practices. In addition, this is consistent with the survey findings that show that as much as two thirds of credit-based transactions can be found in the domestic market.
Against this backdrop dominated by a high degree of uncertainty over the economic recovery, Hong Kong businesses strengthened their credit risk management processes in order to better handle the risk of liquidity constraints from customers. Amid concerns over a forthcoming deterioration of payment practices in B2B trade, as highlighted in our survey, Hong Kong businesses confirmed their interest in credit insurance as the most comprehensive tool for safe growth while pursuing the improvement in business performance they expect to reach over the next 12 months.
Vincent Ku, Country Manager for Atradius in Hong Kong and Taiwan
Far longer payment terms suggest key role of trade credit as source of short-term finance
Along with the increased use of trade credit in B2B sales, survey findings highlight that B2B customers of respondents in Hong Kong enjoy significantly longer payment terms than last year. These are on average two weeks longer, at 43 days from the invoice date. This corroborates the above-mentioned assumption that B2B buyers need suppliers to fill a gap in short-term trade financing in times of severe cash flow issues.
When asked about the underlying criteria for setting payment terms, 38% of Hong Kong respondents reported that they set payment terms in accordance with their company standards and internal business practices, while 31% do so in accordance with industry standards. One quarter of the respondents set individual payment terms, customised according to credit risk and trade relationship with each B2B customer.
Almost all businesses strengthen B2B credit risk management
96% of survey respondents in Hong Kong reported that they strengthened their credit risk management processes in order to better handle the risk of liquidity constraints caused by payment default from their B2B customers.
These most often include self-insurance and trade credit insurance (61% of respondents in each case). This is particularly the case for respondents from large businesses and in the wholesale trade sector. Additional credit risk management techniques cited by Hong Kong respondents include the request of guarantees of payment (reported by 60% of respondents) and of letters of credit (52%).
of respondents in Hong Kong strengthened their credit risk management processes in order to better handle the risk of liquidity constraints caused by payment default from their B2B customers.
Atradius Payment Practices Barometer – June 2020
Upswing in B2B late payments and delays in invoice-to-cash turnaround
According to survey findings, Hong Kong businesses experienced a significant increase in late payments. An average of 48% of the total value of B2B invoices issued by Hong Kong respondents were overdue (far above the 35% recorded last year). This compares to the 52% average for Asia. Long-term overdue invoices (still outstanding after 90 days past due, with a high likelihood of turning into bad debts) amount to 7% of the total value of B2B invoices issued by respondents (significantly above the nearly 3% average of last year). This is well below the 15% average for the region.
Overdue invoices are cashed in within 27 days of the invoice due date, significantly longer than the 16-day average of one year ago, but consistent with the current average for Asia. Hong Kong respondents reported having written off 1% of overdue receivables as uncollectable (below the 2% average of last year and the 3% current average for Asia). This indicates an improved efficiency in debt collection, which is consistent with the strong focus on credit management displayed by Hong Kong respondents. Of note, survey responses show that collecting outstanding debts was most difficult for the ICT/electronics, chemicals and consumer durables industries.
Payment duration in Hong Kong
d = average days Sample: companies interviewed (active in domestic and foreign markets) Source: Atradius Payment Practices Barometer – June 2020
When asked about the reasons for payment delays from their B2B customers, 50% of Hong Kong respondents stated that B2B customers delay payments mainly due to inefficiencies of their internal payment process. A sizeable percentage of respondents (48%) said that B2B customers use outstanding invoices as a form of financing, while 41% that customers pay invoices late due to disputes over the quality of goods or services provided.
In order to manage the risk of liquidity shortages caused by delayed B2B payments, 33% of the respondents said that they needed to increase time, resources and costs to chase overdue invoices, 31% postponed payment of invoices to their own suppliers, while one quarter of the respondents said they needed to request a bank overdraft extension.
B2B customers’ payment practices are expected to deteriorate than to improve
35% of respondents in Hong Kong anticipate deterioration in the payment practices of their B2B customers over the next 12 months, while a notably lower percentage (22%) anticipate improvement. The remaining 43% anticipate no significant change. However, to strengthen their credit management going forward, Hong Kong respondents say they will either ask for guarantees of payment more often or start using credit insurance.
Pointing to current economic challenges, including the ongoing economic uncertainties associated with the coronavirus pandemic, survey respondents, particularly from mid-sized companies and in the manufacturing sector, expressed concern over their cash flow and working capital financing. For 53% of respondents, this will increase businesses’ indebtedness consequently dependence on bank finance. However, half of the Hong Kong respondents believe that the banking system will inject liquidity in the economy in order to offset the impact of the economic crisis on the business community.
of respondents in Hong Kong said that B2B customers use outstanding invoices as a form of financing
Atradius Payment Practices Barometer – June 2020
Uncollectable B2B receivables in Hong Kong
(% of total value of B2B receivables)
Sample: companies interviewed (active in domestic and foreign markets) Source: Atradius Payment Practices Barometer – June 2020
Although a sizeable percentage of respondents in Hong Kong (36%) see a growing threat to their profitability going forward caused by disruptions in global trade, on a positive note, more respondents (47%) anticipate an improvement in the business performance of their industry (in terms of sales and profits) over the next 12 months than those anticipating a worsening (26%).