Overview of payment practices

By industry

Agri-food

Overview

over the past year, the US agri-food industry sold nearly half of its output on credit terms, mainly on the domestic market, offsetting declining demand for core commodities (e.g. corn, wheat and livestock) coming from foreign markets.

The majority of businesses reported that the increased use of trade credit in B2B transactions was chiefly to encourage repeat business with established customers. However, the adoption of a more liberal trade credit policy to stimulate demand also led to

increased costs related to managing trade debts. This was particularly true in relation to the collection of long overdue invoices, which in turn adversely impacted DSo in the industry. To safeguard their liquidity levels, many businesses reported delaying payments to suppliers. This carries the risk of a knock-on effect throughout the industry’s supply chain. With a much wider use of trade credit, tightening credit control procedures should be a focus area for the industry over the coming months.

Industry DSO longer than last year due to less effective trade debt collection

43% of the total value of credit sales is overdue, with the majority of customers settling overdue invoices on average two weeks past the due date. 10% of the total value of the industry’s credit sales was written off.

To minimize the impact of late payments on the business, most survey respondents (63%) told us they declined trade credit requests from new customers as their poor credit quality could have increased financial risk,

while half of the respondents told us that they pursued additional financing from external sources and tightened their internal credit control procedures. 40% of respondents in the US agri-food industry reported an increase in DSO over the past year.

The average is now 54-days. In addition to reflecting less success collecting overdue invoices, the year-on-year rise in DSo reflects the significant reduction in cash flow reported by the industry.

More than half of US agri-food businesses use trade credit insurance

53% of businesses in the US agri-food industry use trade credit insurance to help mitigate credit risks and manage customer credit risk assessments. In addition, nearly 80% also reported managing trade credit risks internally through self-insurance, choosing to take the hit if a customer fails to pay. Interestingly, this is the most commonly used credit management technique in the US agri-food industry. In addition to this, the most commonly used credit management techniques in the industry are adjusting payment terms to reflect credit risk profiles and offering discounts for early payment of invoices.

Looking ahead, businesses in the industry are most concerned about a potential fall in demand for their products and services, containing trade receivables management costs and uncertainties about the continuation of the pandemic over the coming months. This may explain why far more businesses in the industry expect DSO to deteriorate (48%) than to improve (27%) over the coming months. Despite this, business confidence in the industry appears to be positive with a 60% majority of sector respondents anticipating improvement in business performance over the coming months, driven mainly by healthier domestic economic conditions.

ICT/ELECTRONICS

Overview

The ICT/electronics industry is complex and highly diversified, with deeply intertwined supply chains at the worldwide level. Measures to contain the pandemic and its effects, which have significantly affected all aspects of society and accelerated digital transformations, have profoundly impacted the performance of businesses operating in the industry across the world. In the US, ICT/electronics businesses told us they increased their use of trade credit in B2B transactions with 58% of domestic sales made on credit. The survey findings also reveal evidence of more liberal trade credit policies with more

relaxed payment terms offered to B2B customers. Most businesses said that the length of their payment terms depended on the availability and cost of capital needed to finance credit sales, as well as on the availability of credit insurance cover. The strong focus on strategic credit management and protection of business liquidity levels emerges as a focus area for US ICT/electronics businesses, which have attempted to address pandemicrelated uncertainty through cost cutting measures and by drawing down on lines of credit.

Credit control processes have tightened over the past year

An average 52% of the total value of B2B credit sales in the US ICT/electronics industry was reported overdue and 7% was written off. Due to the deterioration of customers’ payment practices over the past year, a significant number of respondents (40%) told us they spent more time, costs and resources on chasing unpaid invoices and tightening credit control processes. This was chiefly undertaken within the frame of internal retention and management of trade credit risk.

To avoid liquidity shortages, survey respondents told us they delayed paying suppliers and requested overdraft extensions.

Interestingly, nearly half of the survey respondents reported marked annual DSO increases, up to a 140-day average (twice as long as the average payment terms). This was caused by significantly longer delays in collecting long outstanding invoices of high value, compared to last year. This may explain why a large number of survey respondents reported increased capital costs over the past year (i.e. financing or interest costs paid from the time sale date till the invoice is payed), along with increased costs in acquiring credit information to assess credit quality and monitor trade credit risks.

Concern about DSO rising is greatest concern for the industry in the US

In light of the significant increases in DSo, it is no surprise that nearly half of the sector respondents listed potential increases in DSO as one of their main concerns over the coming months. Survey respondents told us that they plan to offset this risk by requesting payment guarantees from their customers. ongoing supply chain disruptions impacting international trade were also cited as major reasons for concern by a significant number of

respondents. This may explain why businesses in the industry do not anticipate improvements in business performance (sales and profits) to come from exports over the coming months. Most believe that trade opportunities will arise chiefly from the domestic market, where many ICT/electronics businesses plan to continue offering trade credit in order to stimulate demand and to provide customers with access to short-term trade financing.

STEEL/METALS

Overview

Last year, both payment delays and insolvencies increased in the US steel/metals industry. This put additional stress on a sector already experiencing weak performance due to declining revenues, and increasing pressure on profits caused by delays and cancellations of large capital

expenditure projects. Although metal prices have started to increase again since Q2 of last year, and production has improved with demand in the automotive sector, major uncertainty remains, making this year a challenge for the industry.

Low efficiency when collecting high-value overdue invoices

53% of all B2B credit sales in the US steel/metals industry are overdue and are settled on average 35 days late. 6% of the total value of receivables was written off as uncollectable. 30% of industry respondents told us that their customers’ payment practices deteriorated over the past year.

To protect their businesses from liquidity shortfalls, the majority of respondents reported delaying payments to suppliers, spending more resources and time chasing overdue invoices (40% of respondents each) and postponing investment in expanding the operation and capacity of the business (38%). Not surprisingly, managing trade debts internally, by self-insurance, resulted in a significant increase in administrative costs (as reported

by 47% of respondents). These were skewed further upwards by the cost of managing the collection of overdue invoices internally using dedicated staff (51%) or by outsourcing to a collections agencies (57%).

This emphasis on collection efforts shown by respondents in the US steel/metals industry helped a significant number of respondents keep DSO under control over the past year. However, the nearly 140–day average DSO recorded in the industry points to a significantly longer invoice-to-cash turnaround than the 45-day average payment terms given to customers to pay invoices. This indicates low efficiency in collection of high-value overdue invoices, negatively impacting the liquidity position of the business.

Businesses worry about unsuccessful cost containment over the coming months

Looking ahead, the majority of businesses in the US steel/metals industry told us that their top concern is keeping trade debt management costs under control over the coming months. This is likely in response to the increase in administrative costs for trade debt management reported. Amid uncertainties about the pandemic outlook worldwide, and concern about the impact of ongoing supply chain disruptions on international trade, US steel/metals businesses are also worried about a drop in demand for their products and services. Additionally, respondents cited concerns about potential restrictions to bank lending that could negatively impact access to external financing and liquidity during these challenging economic times.

Despite this deep-seated pessimism, half the businesses surveyed expressed confidence that the performance (sales and profits) of their business would improve over the coming months. Most of the respondents (nearly 50%) believe that growth is likely to stem from both a rebound of the domestic economy and increased exports.

Fewer respondents (20%) anticipated improvement to come solely from stronger demand from foreign markets, and 31% expected that this would come mainly from a rebound in the domestic economy. Against this backdrop, nearly 40% of US steel/metals businesses expressed the opinion that trading on credit will become more widespread over the coming months primarily as a shortterm trade finance tool for customers experiencing financial distress.

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