Why exporters should be cautious when granting credit terms

Why exporters should be cautious when granting credit terms  article image

Australian businesses continue to trade on credit in a relatively-benign risk environment, but credit terms are stretching out which could create some risk of cash flow impacts. 

This is the finding of new research by trade credit insurance provider, Atradius.

Atradius surveyed 205 Australian companies to gather insights on international corporate payment practices. 

Against a backdrop of economic and political risks to global trade growth, and despite the current more benign insolvency environment, the average proportion of sales made on credit in Australia remained unchanged at 43.8 per cent. 

Sales on credit terms occur significantly more with domestic business-to-business (B2B) customers than with B2B customers abroad (50 per cent compared to 37.5 per cent).

Mark Hoppe, managing director, Australia and NZ, Atradius, said: “Australian businesses are granting trade credit to domestic and foreign B2B customers because this is their usual business practice. Selling on credit is also seen as a way to ensure cash flow and expand businesses domestically and internationally.

“However, organisations need to remain cautious when granting credit terms to foreign customers, with over a third of respondents stating they would not authorise credit terms if there’s a high currency risk (39.3 per cent) or high economic or political risk in the customer’s country (35.7 per cent)." 

Late payments

The Atradius Payment Practice Barometer also showed Australia has the second lowest percentage of respondents reporting late payments by their B2B customers (83.2 per cent).

However, unlike in other Asia Pacific countries surveyed, the proportion of foreign past-due B2B invoices is significantly higher than that of domestic past due B2B invoices. 

The report also found a steep increase in the average days sales outstanding (DSO) figure to 34 days, which is 12 days longer than in 2017. 

Payment terms given to both domestic and foreign B2B customers have increased significantly. Domestic B2B customers are given, on average, 25 days to settle their invoices which is five days longer than in 2017. Foreign B2B customers are given, on average, 28 days to fulfil their payment obligations, 11 days longer than in 2017. 

Payment duration in Australia increased to 47 days in 2018, which is two days longer than in 2017 but significantly below the regional average of 57 days.

Main reasons for payment delays

Payment delays by B2B customers seem to occur mostly because of insufficient availability of funds and the buyers using outstanding invoices as a form of financing, stated by 41 per cent of respondents.

Insufficient availability of funds was also the main reason for payment delays by foreign B2B customers, mentioned by 32.3 per cent of respondents. Disputes over the quality of goods delivered and services provided was another frequently mentioned reason for foreign payment delays, cited by 30.7 per cent of respondents. 

After Japan, Australia has the second lowest average proportion of uncollected receivables in Asia Pacific. Uncollected receivables originated most often from B2B customers in construction, consumer durables, business services and services.

The customer going bankrupt or out of business was the main reason for write-offs in Australia mentioned by 46.3 per cent of respondents and in Asia Pacific overall. The second most frequently reported reason for write-offs is the inability to locate the customers, stated by 31.7 per cent of respondents. 

Discounts for early payments

“Australian businesses are generally seeing consistent payments from customers although it would be beneficial to reduce the payment duration,” said Mr Hoppe. “With many customers holding onto payments as a form of financing, businesses could consider offering more attractive discounts for early or on-time payments. 

“When customers aren’t paying because of insufficient funds, businesses should reconsider their relationships with those companies.”

This could indicate that the companies aren’t trading in a viable way. So, terminating the relationship could protect the business from the ramifications if these customers become insolvent.

“Trade credit insurance is a reliable way to protect organisations from late or non-payment, and can also help businesses conduct thorough due diligence so they have a clearer picture of which companies are more risky to do business with,” Mr Hoppe said.

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