Overview of payment practices
The chemicals/pharma industry in Canada ranks among the world’s largest suppliers of chemicals and plastics products. About 80% of Canada’s chemical production is exported, mainly to the US. In the year following the outbreak of the pandemic, businesses polled in the local industry reported increased use of trade in B2B transactions, largely due to consolidated trade relationships with established customers. However, the industry’s more liberal trade credit policy aimed at encouraging repeat business, led to increased costs for
the management of B2B trade debts.
This was in particular due to less effective collection of long term overdue invoices, which adversely impacted DSO in the industry. In 2021, growth expectations are positive, mainly due to the global high demand generated by the pandemic. Pharmaceuticals also benefits from rising health costs, with value added expected to increase further in 2021 after already experiencing a 5% increase last year.
Increased B2B trade debts management over the past year
54% of the total value of B2B credit sales in the chemicals/pharma industry in Canada is overdue. This compares to 41% in the steel/metals industry and 48% in services). On average, overdue invoices are settled by 25-days past the due date. 6% of the total value of unpaid B2B accounts was written off. 55% of chemicals/pharma businesses told us they had to employ more resources and time to chase overdue payments and many told us that in order to avoid liquidity shortages they also sought external sources of funds, with consequent increases in their
capital costs associated with trading on credit.
Perhaps due to the reported increased credit management activities, a significant number of respondents (68%) were able to keep DSO under control over the past year. The remaining respondents reported increased DSO over the same time frame, chiefly due to a more liberal trade credit policy combined with less effective collection of B2B trade debts. Taken together, these survey findings point to DSO now amounting to a 50-day average for the local industry.
of the total value of B2B credit sales in the chemicals/pharma industry in Canada is overdue.
Atradius Payment Practices Barometer – July 2021
More than half of US agri-food businesses use trade credit insurance
A significant majority of the Canadian chemicals/pharma industry are proactive in their approach to credit management. 80% relies on internal resources (selfinsurance), 74% uses factoring and 72% employs trade credit insurance. The majority of businesses in the sector told us that they adjust payment terms offered to B2B customers to reflect their credit risk profile and manage of trade debts collection in-house.
Looking ahead, business in the industry seem to be primarily concerned about maintaining adequate cash flow levels over the coming months, and express concerns over the potential for any continuation of the pandemic economic slowdown to impact their profitability.
This is an indication that much of the chemicals/pharma industry in Canada anticipates financial distress for businesses going forward. This may explain why a significant percentage of respondents (66%) told us that trading on credit with B2B customers will become more widespread in the short-term to allow businesses more time to pay for their purchases on credit. When asked about the outlook for their business performance over the coming months, most of the businesses polled in the industry (nearly 40%) anticipated improvement in sales and profits over the coming months mainly coming from the combination of healthier domestic economic conditions and stronger exports.
Last year, both manufacturers and traders alike in the steel/metals industry in Canada were severely impacted by deterioration of turnover and profit margins. However, due to ongoing government support programs, which remain a key contributor to the Canadian economy, businesses
appear to have successfully cushioned the impact of customer credit risk on their operations. This year the industry has started to benefit from a rebound in some key buyer industries, such as construction. This may explain why, looking ahead, business confidence appears to be positive.
Credit insurance underpins stability of DSO
An average of 44% of the total value of B2B credit sales in the Canadian steel-metals industry were overdue last year, with most of the industry’s customers taking around one month to settle overdue invoices. 3% of the total value of unpaid B2B accounts was written off as uncollectable. Despite this, 66% of steel-metals businesses appear to have successfully cushioned the impact of customer credit risk on their operations and reported no significant change to DSO, which held steady at a 63-day average. This is likely to be due to a widespread strategic approach to credit management, most often involving the use of credit insurance.
Where businesses reported an increase in DSO, the majority told us they opted for relying on their
internal credit management resources (i.e. self-insurance) to minimize the impact of customer credit risk on their business operations. This primarily involved dedicating more resources and time to chasing unpaid invoices and strengthening in-house credit risk monitoring processes. In addition to leading to increased trade debt management costs (as reported by 47% of the respondents in the local industry), this approach proved to be less effective at safeguarding businesses from the negative impacts of deteriorating DSO on the liquidity position of the business. It also resulted in many businesses pursuing additional financing from external sources to avoid cash shortages, which in turn had an adverse impact on the business capital costs.
Average of 44%
of the total value of B2B credit sales in the Canadian steel-metals industry were overdue last year
Atradius Payment Practices Barometer – July 2021
Containment of credit management costs is top of future concerns
Looking ahead into 2021, steel/metals businesses told us their primary future concern is to be able to keep trade debt management costs under control over the coming months. They also cited the uncertain outlook for the pandemic worldwide, alongside concern about protection of liquidity levels. The latter reflects local industry concern over potential difficulties in accessing bank lending leading to impaired liquidity positions over the coming months. Despite this, most of steel/metals businesses in Canada (55%) appear to be confident that their business performance (sales and profits) will not change significantly over the coming months. Industry peers who anticipate improvement going forward believe that predicted growth is likely to stem from both a rebound of the domestic economy and increased exports (52% of respondents). Fewer
respondents (27%) anticipated improvement to come from stronger demand from foreign markets, and 21% expected that this would come mainly from improved conditions of the domestic economy.
Against this backdrop, over half (53%) of the steel/metals businesses in Canada expressed the opinion that trading on credit will become more widespread over the coming months, primarily as a short-term trade finance tool for B2B customers experiencing financial distress. Moreover, most of the respondents in the local industry (58%) do not anticipate any significant change in DSO over the coming months. 26% anticipate increases, mainly due to less effective long-term unpaid B2B accounts collection and the remaining percentage of respondents foresees a decrease in DSO.
During the pandemic the services sector has been heavily affected by decreased turnover and profits due to lockdown measures taken to contain the spread of the virus. Late payments and bad debt have increased across some subsectors of the hospitality services industry.
In contrast, logistics and supply chain service segments (e.g. customs brokers, freight
forwarders, supply chain management and warehousing) continue to see demand. The outlook for customer credit risk remains uncertain, therefore services businesses polled in Canada told us they plan to put in place all measures needed to safeguard their liquidity levels, including requesting guarantees of payment more often, or payment in cash.
Liquidity levels protection paramount for the services sector
Nearly 40% of the respondents in the sector in Canada told us that their customers’ payment practices worsened in the year following the outbreak of the pandemic. This resulted in 48% of all B2B credit sales recorded as outstanding past the due date, on average up to 33 days late. 6% of the total value of B2B receivables was written off. Corrective measures to safeguard businesses from the impact of customer credit risk was most commonly done through reliance on credit management through internal resources (i.e. self-insurance, reported by 61% of respondents). Delaying payments to suppliers was the most common measure applied by respondents in the services sector. In addition, businesses tightened credit control
processes, employed additional resources to chase unpaid B2B accounts and accessed external financing sources to avoid potential liquidity shortages. Interestingly, besides skewing administrative costs upwards, the self-insurance approach led to increased capital cost for a significant number of respondents (42%). This may explain why a sizeable percentage of services businesses in Canada told us they set payment terms according to the availability and cost of capital needed to finance credit sales. The strong focus on liquidity protection measures can be seen in the strict controls on DSO (reported by 60% of respondents) over the past year. DSO now averages 84 days.
Trade debt cost containment top future concern over the coming months
Consistent with the upward trend in administrative costs for managing unpaid B2B accounts, many businesses reported their top future concern is to be able to contain credit management costs over the coming months. Uncertainties over the outlook for the pandemic worldwide, and concern over liquidity levels, also worry businesses in the services sector. When asked for their opinion on the outlook for their business performance (sales and profits) over the coming months, the services sector did not have a clear cut opinion, with half anticipating no change and half predicting improvement.
Most of the latter (42%) believe that predicted growth is likely to stem from both a rebound of the
domestic economy and increased exports. 39% anticipated improvement to come from a rebound of the domestic economy only. The remaining respondents expect improvement in business performance to come from stronger demand from B2B customers abroad. Against this backdrop, 36% of services sector businesses expressed the opinion that trading on credit will become more widespread over the coming months, primarily as a shortterm trade finance tool for B2B customers experiencing financial distress. This may reflect the widespread belief that the Canadian services sector will experience a deterioration of DSO over the coming months, as expressed by 40% of respondents.