The economic toll of the COVID-19 pandemic is incalculable. The World Bank estimates the world economy shrank by 4.3% in 2020, a setback matched only by the Depression and the two world wars.
Every country polled in Western Europe has seen an increase in late payments, according to the Payment Practices Barometer (PPB) survey of businesses in the region by Atradius. The survey, conducted during the pandemic downturn, found that most businesses operating in Western Europe are optimistic about 2021, despite the devastating effects of the virus. While the pandemic isn’t over, respondents believe conditions are likely to improve for European economies soon. The survey provides an important snapshot of how companies across Western Europe have utilized trade credit insurance and are managing their credit risks.
Across the board, businesses in Western Europe have learned that the protection of trade receivables from risk of customer payment default is essential to business sustainability, and we expect delayed payments and insolvencies to spike in 2021. With demand down and financial stress high, businesses must act now to minimize these burdens through creditworthiness assessments. Ensuring adequate financial sustainability will be key to survival for most companies, and the capacity to respond quickly to the volatility of the global business environment has come to the forefront.
Late Payments Increase
Throughout the region, the number of overdue invoices reached 47%, following several months of pandemic lockdowns.
The situation in Western Europe has been critical. There are countries that have been hit severely from the onset of the pandemic, such as Italy and France, and others that started off in a better place but have progressively felt the economic impact of continued lockdowns.
The collection of outstanding invoices is a worry for 38% of businesses in Western Europe. Belgium led the region with the most concerns about cost containment. In addition, 20% of businesses in the Netherlands reported that collecting outstanding invoices would be a challenge for them going into 2021.
Invoice payment is most often delayed due to liquidity constraints of B2B customers. The increase in late payments internationally has created a series of knock-on effects, mainly in the form of financial distress throughout the global supply chains, for economies around the world.
Credit-Management Tools on the Rise
Although the percentage of B2B businesses offering trade credit as a sales tool varies from country to country throughout Europe, the survey results show an increased commitment overall to tighter credit management. With increased risk of insolvencies, most businesses throughout the region said they had used one or more credit-management tools to protect their accounts receivable. Trade credit insurance helps businesses to trade safely and more profitably, while mitigating risk of payment default.
Some businesses in Western Europe began to protect their accounts receivable with self-insurance because of the recession. We saw a great portion of them resort to setting aside funds to prepare for potential losses in the future. This corroborates the idea that businesses have learned the importance of protecting assets amid the economic downturn.
Nearly three in five businesses surveyed reported that they have used credit insurance during the pandemic. In addition, 30% of respondents said they pursued additional financing via banks and other entities.
Regardless of the level of fiscal support or approaches to credit and perceived risk, all businesses throughout the region would benefit from credit management strategies with regular reviews and payment-guarantee protections. For businesses worldwide, the coming months are critical. If there’s no improvement in the pandemic, continued trade restrictions could severely upset economies.
Trade Credit’s Role in B2B Transactions
About 40% of the businesses we spoke to across the region said they sourced credit information directly from their customers. This approach, which was reported most often in France, by 51% of respondents, appears to be frequently used throughout Europe.
Credit insurance can also help suppliers to compete more effectively, by offering better payment terms to B2B customers. With access to more favorable payment terms, buyers are more confident in purchasing from suppliers.
Due to the need for updated information during the pandemic, businesses surveyed throughout Western Europe said they got closer to each other through trade relations with their buyers. The constantly changing landscape of the business environment during the pandemic highlighted the importance of having a close buyer-supplier exchange of information.
The Future Cash-Flow Squeeze
Maintaining adequate cash flow levels is the greatest challenge countries in Western Europe will face this year. Most are likely to have already experienced reduced consumption and supply-side shocks.
The survey results revealed that the greatest impact on business due to the pandemic was on business revenue, with 51% of respondents reporting this. Sales volumes and cash flows were pinched at 45% and 38% of respondents, respectively. The impact was felt most by respondents in Greece, where 69% of businesses reported an impact on revenue, with a 64% impact on sales volume and 55% impact on cash flow.
Respondents in the Netherlands, by contrast, reported improvements in profitability. The country saw a 51% improvement in the cost of capital and a 55% improvement in profitability. This may be due to their government’s decision to take proactive measures to curb losses and support the economy during the pandemic.
Unfortunately, we’re not yet in the post-COVID era, and there are many unknowns remaining. We know that informal and nonessential sectors like tourism and hospitality have been impacted the most due to reduced consumer spending, while some sectors said they’ve seen positive results in terms of revenue. Chemicals and some areas of the food sector weren’t severely impacted from the start, and are positioned to recover more quickly in the coming months.
One of the most important points of feedback from the survey is that Western European businesses feel there is a light at the end of the tunnel, particularly for domestic trade. Many of these businesses used trade credit to stimulate domestic trade and invigorate the domestic economy, which should in turn lead to a quick recovery for international trade.
The survey’s second most-important takeaway is a feeling of confidence toward the future. Forty-five percent of respondents in the region expect the global economy to see improvements in 2021. It’s clear that businesses worldwide are eager to see a healthier global economy in the new year, put the pandemic to rest, and restart confidently as soon as possible.
Silvia Ungaro is a corporate communications manager at Atradius, a global trade-credit insurer.