Late B2B payments may be a hot topic focused in western Europe, but with supply chains weaving their webs across borders, delayed invoice payments are now impacting businesses beyond the region.
Nearly half of B2B sales to corporate buyers within western Europe were transacted on credit, according to a new report from Atradius, a trade credit insurance and risk assessment company.
Suppliers across western Europe dealing with overseas customers, however, are less willing to sell based on credit; researchers found only about one-third of the deals in this case.
“This suggests that respondents in western Europe perceive payment default risk to be higher when selling on credit terms to foreign than to domestic customers,” Atradius concluded in its most recent "Payment Practices Barometer Western Europe 2016" report, released last week.
Analysts noted that this trend remains unchanged from the year prior, suggesting no improvement in the perception of risk for cross-border B2B sellers.
Lost Trust Is Difficult To Regain
Suppliers across western Europe, while varying by country, are generally less likely to trust in an overseas business relationship when it comes to finances. It’s a result of extended payment terms imposed on corporate buyers, researchers said, with suppliers unwilling to sell on credit instead of cash or via letter of credit.
In what Atradius described as “a quite staggering percentage,” 92.4 percent of respondents reported domestic B2B invoices being paid late over the last year.
International buyers have led to late payments a bit less frequently, with 84.6 percent of survey respondents citing late payments from overseas buyers. This figure is on the rise, however, compared with data from 2015, as well as a rise in the value of those outstanding bills.
“This increased exposure of respondents in western Europe to payment risk from foreign customers may corroborate respondents’ perception that trade credit risk is slightly more likely to arise from transactions with foreign than with domestic B2B customers,” the report concluded.
When broken down by industry, overdue payments were most prominent across buyers in the agriculture, machines, consumer durables, metals and construction sectors, where about 40 percent of invoice value is past-due, Atradius stated.
While corporate buyers are late on their B2B bill payments largely due to insufficient funds (making up 60 percent of the instances of late payments), the second most common reason why invoices are paid late is because corporate buyers use the late payment tactic to gain a stronger cash position.
Twice as many suppliers said they expect the payment behavior of their customers to deteriorate than the number of suppliers that expect that behavior to improve, researchers said.
Looking Deeper Into The Cause
A lack of liquidity is the most common reason buyers say they can’t pay a B2B invoice on time, the report said.
Compared to last year, the number of respondents citing insufficient funds by their corporate buyer increased, for both domestic and foreign deals.
But more than a quarter say that their invoices are paid late because their corporate buyers are seeking financial advantage; this concern is more common in domestic B2B deals, too.
These two most commonly cited reasons behind late payments may not be so different, however.
“As already observed in past surveys, these two reasons for payment delay can be seen as two sides of the same coin, as liquidity issues could be claimed by customers to hide their deliberate use of outstanding invoices to finance their business,” Atradius stated.
Additionally, the complexity of the B2B payments process, as well as inefficient banking systems, are other common reasons behind late payments. Atradius researchers concluded that these responses may also contribute to the perception that cross-border trade can be more risky, as cross-border payments processes and infrastructure are often more complex than domestic ones.
The Ripple Effect
“Regardless of the reason why customers pay invoices late, this behavior appears to have adversely impacted respondents in western Europe in a number of ways,” the report stated.
Almost a quarter of respondents said they have had to delay payment to their own suppliers because they’re getting paid late by their corporate buyers — a clear chain reaction of delayed and late payments.
Nearly 20 percent of respondents cited a loss of revenue and the need to act to correct their cash flow as two major consequences of late payments. And more than a tenth said that they have had to work with their banks to receive extended bank overdrafts and access financing to cover the cash flow disruption.
For Atradius researchers, the impact of late B2B payments is simple and clear:
“This means financial pressure on businesses,” the report concluded.