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Poor payment practices impact European businesses

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As we continue our look at payment practices in Europe, Carol Baker assesses Eastern Europe and asks whether trade credit insurance is a cost-effective alternative to retaining credit risk in-house.

5th Jan 2022
Journalist
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Eastern Europe’s cost-effective and productive labour market is often seen as a key trading gateway into the European Union and to a consumer market of 500m.

Half of all invoices are overdue

For UK businesses access to the region’s high levels of English proficiency and skilled workforce is making Eastern Europe a key outsourcing destination for IT and back-office operations. The region is famed for many products from furniture, IT and technology, through to agricultural and biochemicals, and is a favourite of Chinese and Japanese carmakers tapping into the comparatively cheap and highly skilled labour market.

While on the surface the region seems stable, dig a little deeper and research shows that Eastern European businesses are reporting almost half of all B2B sales invoices are overdue, of which nearly 10% will need to be written off.

According to the latest Atradius Payment Practices Barometer for Eastern Europe, in the Czech Republic alone 48% of the total value of B2B invoices are currently overdue, 8% of which were being written off as uncollectable.

Effect of increases in days sales outstanding

This inability to contain year-on-year increases in days sales outstanding (DSO) is having a negative impact on liquidity levels and is leading to many Czech businesses to pursue additional financing from external sources in order to offer trade credit and allow customers extra time to pay. This will inevitably lead to greater concerns of the Czech domestic economy for some months to come.

In a bid to win new customers, Hungarian businesses are also offering extended credit, but 46% say it was coming at a cost with a deterioration in DSO. Adding to this are the ongoing uncertainty over the pandemic and the fear that the deterioration of corporate payment practices will trigger an increase in insolvencies.

In Bulgaria, 42% of B2B invoices were overdue (up from 37% last year), with long overdue invoices of more than 90 days late rising from 4% in 2020 to 6% for 2021, while write-offs were up from 2% in 2020 to 6% this year.

Supported by the global economic recovery, strong domestic production growth and strong exports, businesses in Turkey were to a large extent keeping late payments under control by either avoiding credit altogether (and asking for payment in cash) or by using credit insurance. Despite this, late payments were still affecting 54% of the total value of B2B invoices, with 7% write-offs – as a result, insolvency risk remains high post-crisis.

Nearly 60% of businesses in Slovakia say it is taking them longer than last year to collect overdue invoices, with those in the manufacturing sector (54%), and the steels and metals industry (56%) reporting the longest delays.

Impact on Polish businesses

Polish businesses are also struggling to contain a deteriorating DSO with those in the services sector (46%) and agri-foods (51%) the worst affected.  Across Poland businesses report that 40% of the total value of the B2B sales is currently overdue, with 6% more than 90 days overdue, of which 6% will need to be written off.  Moving forward into 2022, businesses in Poland say they are expecting further late payment delays and insolvencies to rise.

“A military build-up by Russia along the Ukrainian border and a swelling number of migrants coming through Belarus at Polish borders have set the stage for the first foreign policy test of post-Merkel Europe.  Immigration has been one of the most polarising topics for the European bloc and a botched response will have domestic political consequences,” reports Dun and Bradstreet.   

“The post-Merkel German political leadership may not be able to live up to the EU expectation on issues such as energy security, intra-EU cohesion, the bloc’s relationship with Russia, Turkey, US, China and climate policies.  All this will continue to impact businesses both in and working with Europe.”

The energy crisis is causing fresh volatility in energy markets.  As Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, explains: “The warning from the US that if there is an order from Putin to invade Ukraine, Russian gas exports will be targeted, has pushed up the price of wholesale gas again.  But if conflict does break out, it is likely to cause a wave of unease across financial markets, with investors scurrying away from more risky assets and taking shelter in safe haven assets like government bonds, gold and defensive stocks like consumer goods, healthcare and utilities.”

For the UK market, the often tense negotiations with the EU regarding trade are likely to continue and there is still much uncertainty over how this will play out and what effect this will have on trade.  This uncertainty has renewed interest in credit insurance for businesses dealing with Europe.

Credit insurance

Across Europe the appetite for credit insurance is growing.  In Western Europe 56% of businesses say they expect to outsource credit risks through the increased use of trade credit insurance next year to help alleviate pressure on liquidity due to customer insolvency.  Over half (53%) say they have already taken out a policy for 2022 – 55% of which are in the manufacturing sector, and 62% in the machines industry. 

Compare this to Eastern Europe where credit insurance is being used by 72% of businesses in Slovakia, and 69% in Turkey.  Across the region, 68% of large firms report to using credit insurance, 63% of which are in the wholesale sector, 69% in construction materials, and 68% in the steel and metals industries.

However, despite the growing appetite for trade credit insurance, 70% of businesses in Western Europe and 66% of businesses in Eastern Europe have opted to retain credit risk in-house – choosing to absorb any bad debts internally by setting aside bad debt reserves. 

As governments continue to remove insolvency protections and fiscal support, the risks confronting businesses in 2022 will remain elevated.  In an uncertain world, accountants will need to help their clients plan for all the trouble ahead.

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