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Survey Finds Dramatic Increase in Overdue Payments in North America

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Survey Finds Dramatic Increase in Overdue Payments in North America

Will North American businesses remain resilient in the face of COVID-19 challenges? That answer is increasingly difficult to answer in the affirmative, as virus containment measures continue to negatively impact trade, consumer spending, industrial production, unemployment, corporate debt and supply chains.

According to the annual Payment Practices Barometer survey of businesses in the U.S., Mexico and Canada by trade credit insurer Atradius, companies are facing widespread cash and liquidity pressures. Survey data was collected this spring, and conditions have likely deteriorated further. News recently broke, for instance, that the coronavirus caused the U.S. economy to contract 32.9% in Q2, the worst contraction in modern history.

Needless to say, the bleak economic outlook puts businesses in an extremely tight spot, and it is likely insolvencies will rise dramatically, further exacerbating liquidity challenges among organizations in the supply chain. Some troubling signs of deteriorating payment practices and B2B customer credit risk captured in the survey include:

-Overdue payments have increased dramatically. Across the region, 43% of the total value of issued invoices remain unpaid by the due date, a sharp increase from the 25% reported last year.

-The value of invoices overdue by 90 days or more has doubled to 13%.

-Businesses write off 4% of the total value of outstanding invoices, up from 3% in 2019.

The increase in payment defaults is particularly alarming in the U.S., which saw a 72% year-over-year uptick compared to 2019, and in Canada, which saw an 86% increase. In Mexico, the amount of trade receivables firms have written off has doubled since last year.

These trends put a troubling burden on businesses, which end up having to spend more time, resources and funds chasing down overdue invoices. It also means working capital is tied up for longer than before, limiting businesses’ abilities to pay their own suppliers and make strategic investments. In short, rampant late payments cause a bad domino effect, spreading liquidity issues all throughout the supply chain.

UMSCA Firms Are Tightening Credit Controls

Faced with heightened B2B customer credit risk, many businesses across North America are tightening their credit control procedures, the Payment Practices Barometer found.

Firms typically rely on a mix of outsourced risk management, such as credit insurance, and internal tactics such as reducing risk concentrations and increasing debt collection resources. Notably, more than half of the region’s survey respondents plan on upping the efficiency of their debt collection processes through tactics such as payment reminders or outsourcing collections to an agency.

The Payment Practices Barometer also found that while credit-based B2B sales are on the rise across the region, the trend is slowing. Self-insurance against the risk of payment defaults also saw an increase – 66% of businesses rely on this tool compared to 22% last year.

The most prevalent methods of credit control vary by country:

-Many Canadian firms are planning on adjusting payment terms to better align with the credit capacity of customers – average payment terms are now 26 days, compared to 27 days in 2019. They also widely employ payment reminders and work to avoid concentrations of credit risk.

-In Mexico, a significant proportion of businesses employ credit insurance. Additional popular credit management tactics include suspending deliveries until outstanding invoices are paid, requesting payment on cash from B2B customers and requesting payment guarantees.

-U.S. firms focus more on credit management than their peers in the region. A large majority of U.S. businesses manage customer credit risk in-house through self-insurance. Requiring payment guarantees prior to sales and offering discounts for early payment are also widely used tactics.

UMSCA Businesses Remain Hopeful?

Despite the bleak economic outlook and all signs pointing to widespread liquidity issues, the majority of businesses surveyed in North America predicted growth in the coming months, their optimism rooted in the belief that banks will continue to provide credit to cushion the effects of poor cash flow.

But again, that was a few months ago, and business conditions are rapidly changing for the worse. Consumer sentiment, for instance, has fallen back almost as low as in the early days of the outbreak – optimism that COVID-19 will go away any time soon is now a distant memory.

The only thing that can be said for sure is that the business environment in North America is rife with uncertainty with no indication of sunnier skies in the near future. More than ever, businesses need to take a strategic approach to credit management that ensures adequate cash flows and a solid liquidity position.

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Gordon Cessford is the president and regional director of North America for Atradius Trade Credit Insurance, Inc

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COVID-19 Poised to Cause Severe Disruption to Indian Business Conditions

As in so many other countries in the world, turbulent skies lie ahead for India’s economy as a result of the widespread upheaval COVID-19 is leaving in its wake.

Analysts from trade credit insurer Atradius expect that the repercussions of the pandemic will be widespread in India, having dire consequences for trade and causing GDP to contract 3% and business insolvencies to increase more than 30% year-on-year in 2020. This negative outlook tracks with the scenario for the rest of the southeast Asian region, which overall is expected to see a 25% increase in insolvencies this year.

Trouble Brewing For India Ahead of COVID-19

The business environment in India ahead of the global crisis was already on the shaky side. Last year, India’s economy saw weak economic performance, growing only 5.3%, the lowest increase in more than six years. The government – led by Prime Minister Narendra Modi’s reform-minded Bharatiya Janata Party – was focused on solving some of these economic issues, including resolving the banking sector’s bad debt and liberalizing foreign investment restrictions in key sectors. However, it remains to be seen whether those steps will make any difference when the coming wave of business and trade problems hit.

Although the lockdowns imposed to stop the spread of the coronavirus have put an end to clashes for now, an economic downturn that plunges many Indians into poverty could renew and increase social tensions.

Indian Firms Face Significant Headwinds

The comprehensive lockdowns in India that began in late March have caused a drop in domestic demand and a sharp increase in unemployment. Investment and industrial production will likely contract, as well, leading to a 10% or more decline in exports this year. Lockdown measures have especially impacted the millions of daily wage earners and migrant workers employed in India’s informal sector.

Supply disruptions from China, where many manufacturing facilities stood idle for weeks, have caused issues for import-reliant industries, such as pharmaceuticals, consumer durables and electronic manufacturing. Although Chinese plants are largely up and running, supply chain problems could continue should a second spike in COVID-19 cases occur.

Finally, external demand for Indian products has plummeted as key export markets such as the U.S. and China are facing recessions. Although there is no clarity for how long recessions will linger, it is safe to say that export-dependent sectors are in for a tough ride.

All this means most of India’s key sectors are poised to see a deterioration of performance and rise in insolvencies. Specifically, the outlook is poor for India’s automotive and transport, construction and construction materials, consumer durables, electronics and ICT, machines, metals, paper, services, steel and textiles industries. As of this writing, the only major sector with a positive outlook is food.

SMEs, which do not have the financial resilience as larger firms, will likely bear the brunt of the insolvency growth. Even though the Indian government has put forth a sizable stimulus package worth USD 266 billion that includes tax breaks for SMEs and domestic manufacturing incentives, the fundamental weaknesses of the economy represents a severe limit on how much protection the government is ultimately able to provide. In comparison to India’s stimulus package, which Citi analysts peg at around 4% of GDP, Singapore, one of the most stable economies in the region, passed stimulus measures worth more than 10% of GDP.

A Rapid Rebound in India Not Likely

 High corporate debt and the problems plaguing India’s financial sector pre-pandemic will likely get in the way of a quick rebound of the economy. In late 2018, the default of IL&FS, India’s large infrastructure financing and construction company, led to concerns about the financial standing of other non-bank lenders and straining corporate and consumer debt markets. In addition, India’s banks carry a high amount of bad debt – non-performing loans accounted for approximately 9% of bank lending last year.

At the same time, the rupee is seeing depreciation pressure and is at risk of volatility in coming months – a scenario caused in part by the withdrawal of global investments in emerging markets in Q1 as financial markets have become more risk averse since the beginning of the coronavirus outbreak. For Indian firms, this adds to already significant cashflow issues, especially those with high loans in foreign currencies.

The extent and duration of the economic impact of the COVID-19 pandemic remains uncertain, but Indian firms face a variety of significant headwinds. Many won’t survive. For businesses trading with Indian companies, it’s imperative that they closely monitor the financial health of trade partners and mitigate credit risk to protect cash flow.

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Gordon Cessford is the President and Regional Director of North America for Atradius Trade Credit Insurance, Inc.