Late payment trends sound business sector warning

Inflation, which is now hitting Europe’s economies and forcing central banks to raise interest rates, has been a preoccupation for businesses for some time.

When Intrum surveyed more than 11,000 businesses in 29 countries for its annual European Payment Report earlier in the year, 61 per cent said inflation would be one of their most significant challenges over the next twelve months, with those in the transportation sector most worried about it (68 per cent compared with the European average of 61 per cent).

Bad debt yet to hit businesses badly

While bad debt losses hadn’t generally hindered businesses in the previous 12 months, many of those surveyed said they had experienced issues with late payments from their customers.

This was especially pronounced in Energy, Retail and Real Estate, where more than one in four companies said they had problems, compared with less than a third of those in the least affected sector, Construction.

Unfortunately, the true state of financial difficulty for businesses and consumers has to some extent been masked by government intervention during the pandemic and bad debts are expected to rise.

I was expecting bankruptcies, unemployment and high levels of bad debt, but we didn't see any of that due to various subsidies and government support.

Pandemic measures may help businesses

However, some have taken the opportunity to strengthen themselves. The emergency measures and upgrades they have put in place during the pandemic should make it easier for them to weather the storm.

“We are stronger thanks to the development of our e-business and the points of sale we introduced to serve our customers during the lock down periods,” says Gianluca Riselli, CFO at Italian manufacturer Würth. “These new touchpoints have become a strength.”

Governments aren’t the only ones to have offered forbearance. Credit managers at many European businesses have been putting in place measures to ensure customers find it easy to pay.

At fintech Klarna, Vice President of Debt Collection Jan Hansson describes how his company launched an initiative in the Nordic and German markets, called the Pink Standard, to enable increased sustainability in the company’s product offering within online payments .

“We decided to stop all revolving credits, which can go on for a very long time, and we added longer payment terms to reduce the number of customers entering the early arrears stage,” he says. “We also added more nudge reminders and removed certain fees. It was a tough internal process, but in Sweden, we have seen a decrease in reminder rates of 50 per cent already, so it has been highly successful.”

Businesses forced into forbearance to survive?

While there is much companies can do to help their customers, this can put undue pressure on them. In fact, 75 per cent of businesses said they have accepted longer payments than they feel comfortable with.

Those in Telecommunications and Transport & Logistics are most likely to have done so (80 per cent and 78 per cent respectively). Companies in the Construction industry were least likely to have accepted longer terms, though it is notable that even they have a high rate of 70 per cent.

Along with the Utilities sector, Transport and Telecoms businesses were most likely to say they have accepted longer terms to avoid the risk of their customers going bankrupt. More than half of these businesses said they did so for this reason.

During the pandemic it was clear that businesses were doing what they could to help their customers and supply chain. However there is only so much they can do in the face of economic strain. In order to assure their own survival, firms need to implement good lending, reminder and collections policies, acting quickly when there are difficulties so these don’t worsen.

Protection against late payment

Businesses are clearly feeling the pressure, but when it comes to protecting themselves against late payment are they doing everything they can? Only eight per cent of Transport & Logistics companies said they use debt collection to protect themselves, compared with 15 per cent of those in Mining, Technology and Construction.

“This is surprisingly low,” says Anette Willumsen. “Even implementing simple measures can make a big difference. There is much these businesses can do to increase their protection.”

Sectors also differ when it comes to using external debt collection agencies – 22 per cent of Construction businesses do so, the highest rate, while only 15 per cent of those in the Real Estate, Hospitality, Retail and Business Services Sectors use external providers.

Interestingly, firms are quicker to take legal action – especially those in Business Services (59 per cent), Telecoms (60 per cent) and Transportation (59 per cent), all of whom top the European average of 57 per cent.

Legal action should be the last resort. We believe working with customers early is the most effective way to establish what financial or other difficulties they are experiencing and repair the relationship for the future.

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