Supplier Payments Around The World Are Getting Longer, Raising Insolvency Risk

Regulators and analysts in the U.K. have brought attention to the nation’s plight against late supplier payments, but a new report from Euler Hermes warns this is a global issue — one that is worsening and raising the insolvency risk.

Reports in The Financial Times on Thursday (May 3) said Euler Hermes, a trade credit risk insurance provider, found the average number of days it takes a company to pay a supplier (Days Sales Outstanding, or DSO) has reached 66 days around the world, an increase of one-tenth since 2008, the report found. Euler Hermes warned that average DSO for the world is likely to grow this year too.

“This is one of the dark sides of the recovery,” said Euler Hermes Chief Economist Ludovic Subran in an interview with the publication. “Companies are extending a lot of trust in the way that clients pay them — it is a loosening of discipline.”

“The longer you wait, the more risk that your clients hit trouble,” he continued. “When there is a cyclical downturn, the companies with longer payment terms are those that get hit first.”

According to Subran, a quarter of insolvencies can be traced back to the failure of a company’s corporate customer to pay.

While the U.K. earns much of the attention around late payments (the report found average DSO to be 53 days in the U.K.), Euler Hermes discovered the most dramatic increases in average DSO in the U.S., China and the Eurozone — particularly in Spain, Portugal and Greece.

In China, suppliers wait an average of 92 days for invoices to get paid. That compares with businesses in New Zealand, which wait an average of 43 days; South Africa, Denmark and Austria also saw relatively shorter invoice payment times.

Subran told the publication that delaying payments to suppliers is a tactic by companies to use their vendor as an “invisible bank” for free financing.

“In some sectors, everyone accepts late payments. But in others, such as consumer industries, they want shorter payment times because margins are thin and they need the money to buy more supplies,” he said.