Covid pandemic leads to deterioration of UK payment practices

Late payments have escalated since the onset of the coronavirus pandemic, reveals the latest UK Payment Practices Barometer by leading trade credit insurer Atradius.

The new Atradius report reveals that nearly half the value of B2B bills are being paid late, while half of the businesses surveyed have been hit by revenue loss and for every £100 of products or services sold, £8 is written off as uncollectable.

Sales on credit

The Atradius UK Payment Practices Barometer reports as much as 60% of the total value of B2B sales in the UK are made on credit with 43% of businesses increasing the amount of sales made on credit by one third since the pandemic began. The primary reason for offering credit is to stimulate sales in the domestic market, reported by two thirds (65%) of businesses. A quarter (24%) of businesses said they grant credit to stay competitive but more than one in 10 (11%) said they did so to provide a source of short-term finance to B2B customers. However, more than a third (38%) of businesses said they had needed to turn down requests for trade credit due to a worsening in customer payment behaviour.

Late payments rise

Since the onset of the coronavirus pandemic, the proportion of late payments has increased. UK businesses report 47% of the total value of invoices are paid late. This is a significant increase of 81% compared to pre-pandemic levels when 26% of invoices by value were paid late. Nearly half (45%) of businesses also now report waiting an average of 20 days longer to turn overdue invoices into cash; longer than just 14 days last year.

Risk of non-payment

UK businesses report 5% of the total value of receivables was still outstanding at 90 days. However, the longer receivables remain unpaid, the lower likelihood there is of collecting them with businesses losing an average of 63% of the value of receivables which were not paid by the 90-day mark. Worryingly, as much as 8% of the total value of receivables was written off as uncollectable since the onset of the pandemic; equating to £8 in every £100 billed.

The Atradius Payment Practices Barometer found half of UK businesses experienced revenue loss following the onset of the pandemic and more than a third (39%) reported cashflow difficulties as a result of increased payment defaults.

Pandemic changes payment terms

The economic climate since the Covid-19 pandemic began has prompted extensions in payment terms with more businesses offering customers longer to pay. Nearly half (48%) of businesses surveyed have granted extended payment terms, giving their customers an average of 30 extra days to pay. While last year, 91% offered maximum 30 day payment terms, during the pandemic this dropped to 78%, with 14% offering terms of 31-60 days (up from 8% last year) and 4% offering 61-90 days (up from 1% last year). And while last year no businesses reported offering terms of over 90 days, during the pandemic 4% admitted they had done so.

The main reason cited for lengthening payment terms was to encourage sales on the domestic market (36% of businesses) while a quarter (25%) did so to provide short-term financing for customers in financial distress. However, Atradius warns this approach can be risky as businesses may incur financial and administrative costs by tying up their money in receivables.

Business response

To avoid liquidity shortages, nearly half (48%) of businesses increased time, cost and resource to collect outstanding invoices while more than a third (39%) reported more frequently sourcing customer credit information to assess creditworthiness. Nearly half (49%) of businesses now send more frequent outstanding invoice reminders while nearly two-thirds (64%) offer discounts for early payments, while 46% plan to use credit insurance to protect themselves from non-payment.

Outlook

Although the pandemic inevitably creates uncertainty for recovery and future growth, respondents to the survey indicate that business optimism prevails. At least half of the UK businesses surveyed believe customer creditworthiness will improve next year and more than half (55%) expect the domestic economy to improve, while 48% expect improvement in the global economy. 51% anticipate international trade to grow next year. However, despite these levels of optimism, concerns over the pandemic and consequent recession remain in particular the potential threat to business profitability. 43% predict a fall in demand will be the greatest challenge to business profitability next year while 39% believe the challenge will be centred on maintaining adequate cash flow.

James Burgess, Head of Commercial for Atradius UK, commented: “The Covid-19 pandemic arrived at a time when the business community in the UK was already working hard to accommodate the challenges and uncertainties posed by Brexit. For some industries, such as retail and automotive, the lockdowns and disruptions to supply chains have added further stress to sectors that were already grappling with structural challenges, such as migration towards online shopping and electric vehicles respectively.

“While the Barometer indicates a degree of optimism within the business community, the next six months present a critical time for firms across all sectors. While uncertainty surrounding the progression and consequences of the pandemic continue to weigh heavily we are also now close to December 31 and the end of the Brexit transition period. Businesses will need to be prepared for further challenges and take steps to protect their receivables while also seizing opportunities to trade and grow.”