Overview of payment practices
Overdue invoices affect three fifths of total B2B sales value
According to respondents from the chemicals industry in the UAE, 64% of the total value of B2B invoices is overdue and less than 1% is written off as uncollectable. Just under half (36%) is paid on time. Due to late payments from their B2B customers, over half of the respondents (52%) needed to delay payment of invoices to be able to pay bills and staff. In terms of debt collection, many respondents (26%) reported they had the most difficulty in collecting outstanding debt from B2B customers in the construction industry, while for 20% it was most difficult in their industry.
For most of the respondents (79%), B2B customers pay invoices late due to liquidity shortages, while 63% attribute late payment to the market power of the customer. Reflecting low efficiency in collecting long-term outstanding invoices of high value, 22% of respondents reported DSO (Days Sales Outstanding) figures up to 30 days, 29% up to 90 days and 49% of 90 days or more. This results in an 83-day average DSO for the industry.
Letter of credit the most common credit risk mitigation tool in the industry
In order to manage customer credit risk, and ensure the financial viability of the business, the majority of respondents from the UAE chemicals industry (71%) reported they most often requested letters of credit to be initiated by the B2B customer prior to a credit sale. 62% of UAE respondents requested guarantees of payment from their B2B customers to ensure fulfilment of payment obligations.
Despite their strong focus on credit risk control, still a sizeable percentage of respondents (36%) reported they needed to delay payments to their own suppliers to remain financially sound, increasing time, resources and costs to chase overdue invoices. For 69% of respondents this involved, in particular, a strengthening of their internal debt collection procedures.
Deterioration of B2B customers’ payment habits expected
Far more survey respondents in the UAE chemicals industry expect their customers’ payment practices to deteriorate (56%) than to improve (42%) over the coming months. Only 2% of the respondents have an optimistic view in this regard. Owing to the anticipated deterioration, 3 in 5 respondents reported that over the coming months they will keep on using the same credit management tools they are currently using (see earlier on in this report) aimed at strengthening credit control procedures to protect cash flow and the investment capacity of the business.
The majority of respondents in the UAE chemicals industry (76%) believe that dependence on bank finance will increase over the coming months due to the increased indebtedness of the industry. However, far more respondents (38%) expect banks to decrease the provision of financial support to the industry to alleviate temporary cash flow shortages than those expecting it to increase (28%). Against this backdrop, 54% of respondents are of the opinion that the UAE chemicals industry business performance (sales and profits) will deteriorate over the coming months.
of UAE respondents in the chemicals industry expect their B2B customers’ payment practices to worsen .
Atradius Payment Practices Barometer – June 2020
Liquidity issues the most common reason for late payments in the agri-food industry
Late payments in the UAE agri-food industry correspond to an average of 73% of the total value of the B2B invoices issued. Long-term outstanding receivables (those more than 90 days overdue, with a high likelihood of turning into bad debts) average 12% of overdue payments. Both percentages are in line with the country averages. B2B customers in the UAE agri-food industry pay invoices late most often due to liquidity shortages (57% of survey respondents) while for 33% of respondents, late payments are attributable to B2B customers using outstanding invoices as a form of financing.
The proportion of B2B receivables written off as uncollectable in the UAE agri-food industry averages less than 1% of the total value of B2B invoices (in line with the country average). In terms of debt collection, respondents reported they had the most difficulty in collecting outstanding debt from B2B customers in the food industry. 44% of UAE respondents in the agri-food industry reported DSO (Days Sales Outstanding) up to 30 days, 28% up to 60 days and the same percentage of 90 days or more, resulting in a 71-day average (country average: 88 days).
Majority of suppliers in the UAE agri-food industry request cash payments in B2B trade
Nearly 60% of respondents in the UAE agri-food industry ask their B2B customers to settle invoices in cash, cash equivalents or in terms other than trade credit to safeguard the business from the risk of customer payment default. The request of letters of credit or of guarantees of payment prior to a sale on credit is reported by 51% of the respondents. For 41% of respondents, customer credit risk is best controlled through the adjustment of payment terms to reﬂect creditworthiness, as well as the trade relationship with the B2B customer.
Despite their strong focus on the liquidity aspect involved with the granting of trade credit, nearly half of respondents in the industry reported difﬁculties in paying bills and staff. This implied the need to delay payments to their own suppliers to remain ﬁnancially sound, and to strengthen their internal credit control procedures through a substantial increase in time, resources and costs to chase overdue invoices.
Agri-food industry in the UAE pessimistic about future payment habits of B2B customers
As survey ﬁndings reveal, far more respondents in the UAE agri-food industry (68%) are pessimistic about the future trend of their B2B customers’ payment habits than those who expect an improvement (32%). The anticipated deterioration is forecast to cause an upswing in long overdue invoices. However, in order to mitigate customer credit risk over the coming months, the majority of respondents (82%) reported they will keep on using the same credit management tools they are currently using (most often letters of credit and guarantees of payments). However, 33% of respondents plan on requesting payment in cash, or cash equivalents, from their B2B customers more frequently going forward.
Consistent with their pessimistic view about the future trend of their B2B customers’ payment practices over the coming months, most respondents in the UAE agri-food industry (64%) believe that the overall indebtedness of their industry will increase and with that businesses will be more dependent on bank ﬁnance. Despite this, 36% of the respondents are conﬁdent that banks will continue to support businesses over the same period to alleviate pressure on cash ﬂow, while 26% anticipate no change and a sizeable percentage (30%) anticipate that banks will decrease lending to the industry.
of the total value of the B2B invoices issued in the UAE agri-food industry is overdue.
Atradius Payment Practices Barometer – June 2020
Steel / Metals
Four out of five invoices in the industry are overdue
Based on survey responses, a very high proportion of working capital is tied up in B2B receivables, as 80% of the total value of the B2B invoices issued in the industry has been reported to be overdue (above the 72% country average). Long-term outstanding receivables (those more than 90 days overdue) average 16% of overdue payments. This is above the 13% country average. According to survey findings, most of the respondents in the UAE steel/metals industry (65%) attribute late payments from B2B customers to liquidity issues. For 53% of respondents, late payments were due to B2B customers’ market power.
The proportion of receivables written off as uncollectable averages 2% of the total value of B2B invoices issued in the industry, (higher than the country average currently at less than 1%). Respondents reported they had the most difficulty in collecting outstanding debt from B2B customers in both the construction and construction materials industries. When asked to indicate their average DSO (Days Sales Outstanding), 24% of UAE respondents in the steel/metals industry reported DSO up to 30 days, 36% up to 90 days and 40% of 90 days or more, resulting in a 110-day average (significantly above the 88-day average for the country). This indicates very low efficiency in collections of overdue invoices of high value, depriving businesses of funds that could be used in their operations.
Significant increase in costs and resources to chase overdue invoices
To mitigate customer credit risk, respondents in the UAE steel/metals industry focused on increasing costs and time to chase and collect unpaid invoices (55% of respondents). 46% of respondents reported they needed to safeguard the ﬁnancial ﬂexibility of their business, alleviating pressure on cash ﬂow. Many respondents did so by suspending deliveries until payment of invoices from the customer (37% of respondents).
In order to link the mitigation of customer credit risk with their trade credit policy decisions, most respondents in the UAE steel/metals industry (47%) reported that they frequently adjusted credit payment terms to reﬂect the credit quality of their customers. Moreover, 42% of respondents said they planned to avoid credit risk concentration through reducing reliance on a single buyer.
Upswing in long overdue invoices expected due to worsening of payment habits
The majority of respondents in the UAE steel/metals industry (55%) anticipate that their B2B customers’ payment practices will deteriorate over the coming months, causing an upswing in long overdue invoices. 42% anticipate no change in customers’ payment habits, while 3% foresee an improvement. To mitigate the expected worsening of customer credit risk, 35% of the respondents plan on requesting payment in cash or cash equivalents more often, while many respondents (22%) plan on offering discounts for early payment of invoices.
According to 44% of respondents, over the coming months dependence on bank ﬁnance by the UAE steel/metals industry will increase due to rising levels of indebtedness. 50% of respondents expect the industry’s business performance to worsen over the coming months. However, many respondents in the industry (40%) believe that banks will continue to give the same level of ﬁnancial support to the industry, or even to increase it, over the coming months.