Financial, Political Woes Hit Eastern Europe’s SMEs Hard

Late payments are a new normal for many of Europe’s businesses, and for eastern Europe, SMEs are in an especially tight spot. External factors including weak growth throughout the Eurozone and tensions between Russia and Ukraine continue to put pressure on the region’s small business owners, increasing the likelihood of delayed payments.

Based on feedback from more than 1,000 businesses in the Czech Republic, Hungary, Poland, Slovakia and Turkey, the May 2015 Atradius Payment Practices Barometer survey highlighted the uphill battle ahead for eastern Europe’s businesses. On average, businesses in eastern Europe extend payment terms of 30 days on domestic invoices and 31 days for international ones. Yet, more than 40 percent of the total value of domestic B2B invoices remain unpaid at the end of the payment period. Foreign invoices for the region fare slightly better, with just over 34 percent outstanding. For both domestic and foreign invoices, Turkey leads the area in percentage of overdue invoices with 55.2 percent and 49.8 percent, respectively. Hungary enjoys the fewest late payments, at about 30 percent of domestic invoices and 20 percent of international ones.

Across eastern Europe, businesses are constricting trade credit. Most of the nations surveyed saw the number of credit transactions fall hard, by an average of 10 percent. Credit sales have also decreased. Compared to 2014, credit sales dropped by 7 percent to 40.7 percent of total B2B sales. In the face of an increasingly complex and ever-changing business environment, companies are using trade credit conservatively. Although domestic invoices are more likely to be overdue, businesses are more likely to extend credit within their own borders. Of the credit extended to trade partners, nearly half is for local buyers.

The Atradius report showed that businesses have good reason to extend credit less frequently. The past two years have seen a marked increased in late payments. As a whole, late payments across eastern Europe have increased by 10 percent. The Czech Republic saw the largest increase, jumping 17 percent since 2013.

While a large amount of invoices are overdue, very few become uncollectible. Just 1.1 percent of receivables in eastern Europe were reported as write-offs. Most unrecoverable accounts are related to the construction and business services sectors. The majority of unrecoverable receivables are due to the customer going bankrupt or out of business. Of those businesses that did not close, failed collection attempts were the top reason for business write-offs.

The bright spot in the late payments saga: while still overdue, sellers are waiting fewer days for payment. From invoice to payment, the number of days sales outstanding (DSO) has fallen to 59 days on average, four days shorter than one year ago. Domestic invoices tend to be paid three weeks after the due date. International invoices are closed sooner—18 days post-terms. With the exception of Turkey, domestic payment delays have decreased over the past two years. Sellers in western Europe haven’t seen the same downward trend.

Insufficient funds are the No. 1 reason for late payments. Sixty percent of respondents in eastern Europe attributed late payments to lack of cash flow. Companies in western Europe experience similar pressure, with just under 52 percent of respondents agreeing that insufficient availability of funds prevented invoices from being paid on time. Some businesses may have the cash on hand, but are using delayed payments as a form of financing. Respondents in both eastern and western Europe believed up to 35 percent of domestic customers and nearly 29 percent of international customers use withholding payment as a means of improving their financial situation.

Lack of cash flow and a need of financing are two internal factors contributing to the depth of Europe’s late payment issues, but outside factors will aid in making 2015 a tough year. “Continued weak economic growth in the Eurozone, geopolitical tensions around Russia and Ukraine, and volatile global financial markets are putting significant pressure on the economic and business climates in many Eastern European countries,” Andreas Tesch, chief market officer of Atradius, said in a statement about the report. “The cumulative pressure creates downside risks to the region’s economic climate. This will likely cause the levels of overdue payment and default on B2B invoices to remain high this year. Against this backdrop, diligent management of trade credit risk becomes essential to maintaining the financial health of the business.”

The effects are spreading beyond Europe’s borders — for example, to Asia, where suppliers have been warned to prepare for delayed payments from European suppliers. If payment issues aren’t solved, Asian markets could face real repercussions. About one-third of Asian trade comes from the European Union according to data from the European Central Bank.