B2B late payments decline despite an insolvency surge in some advanced Asian markets
As reported in the Atradius Insolvency Forecast, the global rate of insolvencies is expected to increase by 34% this year. Some of the sharpest year-on-year increases will be seen in Asia, with insolvencies in Hong Kong predicted surge by 68% and South Korea by 45%.
It is heartening, therefore, to see that despite such terrible insolvency statistics, the region’s bad debts have dropped this year. In the most recent Atradius Payment Practices Barometer Survey Report for Asia, an average of 5% of total B2B invoices were written off, down from 7% recorded last year. There was also a significant year-on-year improvement in late payments, with a 12% decrease in the proportion of overdue invoices across the region.
Why are businesses reporting fewer bad debts despite the rise in insolvencies?
The primary reason so many businesses in Asia are reporting a decline in bad debts is because they have tightened their trade credit processes. Half of the businesses we spoke to reported increasing the effort and resources they employed to focus on the collection of overdue B2B invoices.
Nearly half of those polled (47%) reported employing trade credit insurance to protect their accounts receivable. Letters of Credit were also popular, particularly for foreign transactions.
Some of the businesses we spoke to eliminated the risk of late payments and bad debts completely by removing credit options from their sales. 49% of all B2B sales in Asia were made on credit, 6% fewer than last year, although there were fairly wide regional differences.
Businesses in Singapore reported a 40% year-on-year decline in B2B credit sales whereas businesses in Vietnam transacted 16% more business on credit.
Are credit sales important to businesses in Asia?
Although cash is still king in many of the region’s markets, credit is also recognised as an important tool for successful trade. Although there was a 6% year-on-year decrease in credit sales on average for the region as a whole, a significant proportion of businesses told us that not only had they continued to offer credit to their customers, they had actually made their credit terms more lenient. In fact, credit terms for Asia as a whole now average 60 days.
For many of the businesses polled, credit is offered to customers in a bid to support their liquidity during this period of challenging economic conditions.
This is because businesses value ongoing trading relationships in addition to gaining a competitive edge when trying to win sales in the first place.
This is especially true for businesses trading with European and North American markets which are experiencing more sluggish growth than many Asian countries, especially Asian emerging markets.
Confidence across the region is strong, with 70% of businesses anticipating a growth in demand next year. More than half also expect to see an improvement in Days-Sales Outstanding (DSO).
Perhaps the key takeaway is that credit can be an incredibly valuable tool for trade and, as shown by so many businesses in Asia during the past year, it doesn’t have to represent increased risk of non-payment if managed well.