The shutdown of retail worldwide this spring has resulted in a rampage of late payments to suppliers at unprecedented levels. In Asia, China and Singapore are doing better than their neighbors, while India is facing the most delays on payments. Late payments are affecting about 72 percent of the value of B2B invoices, according to Atradius Trade Credit Insurance. Late payment or non-payment is causing a negative cascading effect for vendors, who lack the cash to pay their suppliers. Lenders are tightening up on credit facilities, which is further reducing liquidity. Even as orders start to return, the question will be whether or not manufacturers will have the means to buy materials since their suppliers will also be in weak cash positions. “This is affecting well capitalised companies who – absent COVID-19 – would be trading profitably. However, not all these companies will be able to negotiate the facilities they need from their existing banks,” according to Deloitte. They point out that banks are limiting their risk tolerance, companies have less available collateral, and banks’ credit approval timescales may be too slow to deliver the necessary funding in time. “For many companies, the revenue lost in this period represents a permanent loss rather than a timing difference and is putting sudden, unanticipated pressure on working capital lines and liquidity,” said a Deloitte report. <blockquote> “For many companies, the revenue lost in this period represents a permanent loss rather than a timing difference and is putting sudden, unanticipated pressure on working capital lines and liquidity" <footer> <cite>- Deloitte</cite> </footer></blockquote> <h3><strong>Risky Business Practices Hit Hard</strong></h3> An estimated 25 percent of bankruptcies are due to unpaid invoices, according to Coface, a credit insurance company. Over the years, B2B business shifted away from letters of credit (LCs) with more suppliers willing to sell on open account. While much riskier, suppliers did it anyway in order to win business in a very competitive market. Many turned a blind eye to the buyer’s financial statements, which if reviewed would have indicated just how much risk existed, even without a pandemic. According to global law firm King & Spalding, “there’s been a signification shift in trade finance from ‘supplier-led notified transactions to supplier-led non-notified transactions,” referring to the acquisition by banks of a company’s receivables. As of the first quarter of 2020, about 46 percent of export sales and 54 percent of domestic sales of textiles and apparel were made on credit or open account, according to Atradius data. Most of the textile industry manage customer credit risk internally through self-insurance. Letters of credit and bank guarantees are also often used in the industry to mitigate customer credit risk. However, to remain financially sound, 43% of respondents reported they needed to delay payments to their own suppliers, and 41% needed to pursue additional financing from external sources, according to a survey by Atradius. <blockquote> An estimated 25 percent of bankruptcies are due to unpaid invoices. <footer> <cite>- Coface Credit Insurance</cite> </footer></blockquote> <h3><strong>Talk of Change</strong></h3> At least for now, suppliers are committed to tighter credit management. Whether this holds up in the race to get orders, which are now even scarcer than before, will be interesting to watch. For many of the stronger suppliers, government support programs will sustain them until the global economy rebounds. The weakest ones will not survive, even with bailouts. The best of the best will tighten up credit management, but will mostly likely opt for a hybrid solution that gives buyers a bit more flexibility. Still, credit insurance will play a bigger role, and we’ll see more use of Letters of Credit and bank guarantees. As such, the forecast of a robust V-shaped recovery in 2021 is surrounded by a high level of uncertainty.