USMCA: trade credit risk worries businesses

Canada – The Canadian economy continues to operate near its potential and the composition of growth is more balanced. GDP is forecast to grow below 2% this year as export, household consumption and investment growth further ease. However, the Canadian economy should still experience positive momentum, with low unemployment, manageable inflation and rising, but historically low interest rates. Insolvencies are expected to level off this year.

Mexico - Although Mexico is well-positioned to withstand shocks, as its external finances remain strong, the country’s economic outlook is weakening, with GDP growth forecasts being revised downward to 1.4% in 2019 and 1.9% in 2020. This was chiefly due to slower-than-expected growth in the US, its main trading partner. Private consumption, however, will remain the main engine of growth.

The U.S - Despite solid fundamentals, underpinned by persistently strong household and business confidence, clouds are developing over the U.S. economy. Fiscal and trade policy risks have increased, posing a double threat to the strong domestic economy. There is still confidence that the next recession won’t start in 2019, however the risk of a downturn occurring sooner than expected has increased.

Mexican respondents’ are the least likely in the USMCA region to offer B2B customers credit terms

 

 

Survey respondents in both the U.S. and Canada have historically shown a preference for selling to their B2B customers on cash rather than on credit terms. However, current survey findings in both countries point to a shift in preference to selling on credit this year. In the US, 55.2% of the total value of respondents’ B2B sales was reported to be made on credit (up from 44.6% last year). In Canada, this percentage reaches a high of 57.2% (up from 46.1% one year ago). Conversely, in Mexico respondents continued to show a preference for the safety of cash-based sales. On average, 45.4% of the total value of respondents B2B sales was on credit (no variation compared to last year). Following the USMCA agreement in 2018, 87% of the suppliers interviewed in Mexico (up from 81.5% last year) either increased or did not vary their trade volume with the U.S. over the past year. This is the case for 92% of the suppliers interviewed in Canada (up from 90% one year ago). On average, 7 in 10 respondents said that the change in exports to USMCA buyers was due to both economic reasons and government trade policies. 

U.S. and Mexican respondents request quicker payment of invoices compared to last year

In response to a heightened perception of the payment default risk arising from trading on credit with B2B customers, U.S. and Mexican respondents requested quicker payment of invoices than one year ago. Payment terms have dropped to an average of 24 days in the USA and 26 days in Mexico (last year 27 days and 33 days respectively). These terms compare to the average 37 days granted by Canadian respondents (up from a 25 days average last year).

Checking buyers’ creditworthiness and reserving against bad debts form the basis of USMCA respondents’ credit management policies

 

 

Consistent with the heightened perception of the payment default risk commented on earlier, the credit policies of both U.S. and Mexican respondents revolves around the assessment of a prospective buyer’s creditworthiness prior to any trade credit decision. 38% of respondents in Mexico and 35% in the U.S. regularly check creditworthiness. This percentage falls to 30% in Canada, where the most used credit management practice seems to be reserving against bad debts. 33% of Canadian respondents, compared to 28% of respondents in the U.S. and 18% in Mexico) maintain bad debt reserves. Of note, a sizeable percentage of Mexican respondents’ (32%) reported they either sell on a cash basis or request secured forms of payment from B2B customers. In order to shorten the cash conversion cycle, they also offer discounts for early payment of invoices almost as often as they request payment on cash.

One fourth of the total value of the B2B invoices issued by USMCA respondents is past due

On average, one fourth of the total value of the invoices issued by USMCA respondents to their B2B customers was not paid by the due date. To convert past due invoices into cash, Mexican respondents wait an average of 43 days (down from 66 days last year) and U.S. respondents 39 days (down from 51 days last year). In contrast, respondents in Canada now wait on average 54 days (up from 49 days last year). The 12 day increase in average payment terms only having a five day impact in payment duration. To alleviate the financial pressure on the business and protect the viability of the company, 39% of Mexican respondents (27% in the US, 29% in Canada) needed to pay invoices to their own suppliers late. In the U.S., 30% of respondents took measures to correct cash flow and one in four respondents needed additional financing from external sources. On average, in the U.S. 1.3% of the value of B2B receivables was written off as uncollectable (compared to 1.2% last year). This was 1.4% in Canada (1.5% last year) and 2.0% in Mexico (stable compared to one are ago).

More respondents in the U.S. and Canada than in Mexico expect their customers’ payment practices to worsen over the coming months

Most respondents in the U.S. and Canada (55% and 52% respectively) do not expect payment practices of B2B customers to change significantly over the coming months. However, 33% of U.S. respondents expect an increase in late payments and in the number of U.S. firms filing for bankruptcy this year, while 27% of respondents in Canada anticipate a worsening of their customers’ payment habits in the form of increased late payments. Mexican respondents, in contrast, appear to have a very optimistic view about the outlook of their B2B customers’ payment behaviour. 44% expect an improvement in the coming months. When asked to indicate the credit management tools and practices they will use over the coming months, respondents in Mexico and the U.S. (63% and 51% respectively) said they will sell on cash terms more often. Nearly half of U.S. respondents and 41% of respondents in Canada said they will increase dunning activities.

Overview of payment practices in the USMCA region

By business sector

Canada

Average payment terms longest in the ICT/electronics sector - shortest in the services sector

Canadian respondents from the ICT/electronics and the construction sectors extended the longest average payment terms (averaging 37 days and 35 days from the invoice date respectively). The shortest average payment terms were set by respondents in the services sector (averaging 29 days).

Trade credit risk is highest in the ICT/electronics sector and lowest in the services sector

The value of overdue invoices is highest in the ICT/electronics sector at 34.4% of the total value of B2B invoices. The construction sector at 33% follows. The services sector is the lowest at 22%.

Proportion of uncollectable receivables highest in the construction sector and lowest in the services sector

The construction sector in Canada reported that 1.7% of their B2B receivables were written off as uncollectable, the highest proportion in the country. The consumer durables sector followed at 1.6%. At 1.1%, the services sector is at the low end of the scale.

Mexico

Longest average payment terms in the ICT/electronics sector - shortest in the consumer durables sector

Mexican respondents from the ICT/electronics and construction sectors extended the longest average payment terms (averaging 36 days and 33 days from the invoice date respectively). Respondents in the consumer durables sector set the shortest average payment terms (averaging 16 days).

Trade credit risk is highest in the construction sector, and lowest in the chemicals sector

The value of overdue invoices is highest in the construction sector at 35.0% of the total value of B2B invoices issued by Mexican respondents. The agri-food sector follows at 28.3%. The chemicals sector averaged a low of 12%.

Proportion of uncollectable receivables highest in the ICT/electronics sector and lowest in the chemical sector

The ICT/electronics sector in Mexico reported that 2.3% of their B2B receivables were written off as uncollectable, the highest proportion in the country. The agri-food sector follows at 2.2%. At the lower end of the scale, the chemical sector reported a low of 1.1%. 

USA

Average payment terms are longest in the chemicals sector and shortest in the agri-food sector

U.S. respondents from the chemicals and the machines sectors extended the longest average payment terms (averaging 38 days and 31 days from the invoice date, respectively). The shortest average payment terms were set by respondents in the agri-food sector (19 days), followed by the construction and transport sectors (averaging 20 days).

Trade credit risk is highest in the U.S. metals sector and lowest in the transport sector

The value of overdue invoices is highest in the metals sector at 40.4% of the total value of B2B invoices. The ICT/electronics sector at 33% and the construction sector at 32% follow. The transport sector recorded a low of 11%.

Proportion of uncollectable receivables is highest in the ICT/electronics sector and lowest in the agri-food sector

The ICT/electronics sector in the U.S. reported that 1.9% of their B2B receivables were written off as uncollectable, the highest proportion in the country. The machines sector follows at 1.7%. At the lower end of the scale, the chemicals sector reported that an average of 1.1% of B2B receivables are written off as uncollectable and the agri-food sector less than 1%.

By business size

Canada

Large enterprises in Canada set the longest average payment terms for B2B customers

Respondents from large enterprises in Canada extended the longest and those from SMEs and micro enterprises the shortest average payment terms to B2B customers (averaging 37 days and 30 days from the invoice date respectively).  

Large enterprises wait the longest to be paid overdue invoices

Over the past year, large enterprises in Canada recorded the highest increase in the proportion of B2B invoices paid on time (+16% on average). Even with this improvement, overdue invoices in large enterprises still account for 33.8% of the total value of B2B invoices. In contrast, on time payment of B2B invoices issued by SMEs decreased 13% on average. Despite these changes, large enterprises are still the slowest to collect payment of overdue invoices (on average after 55 days). This compares to 51 days for SMEs and to 39 days for micro enterprises.

Large enterprises record the highest rate of uncollectable receivables

Being the slowest in collection of past due invoices, large enterprises in Canada also logged the highest proportion (3.0%) of B2B receivables written off as uncollectable. The average for SMEs is 1.9% and for micro-enterprises less than 1%.

Mexico

SMEs set the longest average payment terms for B2B customers

Respondents from SMEs in Mexico extended the longest and those from large enterprises the shortest average payment terms to B2B customers (averaging 27 days and 12 days from the invoice date respectively).  

SMEs wait the longest to be paid overdue invoices….

Over the past year, SMEs in Mexico recorded the highest increase in the proportion of B2B invoices paid on time (+28% on average). Due to this change, overdue invoices in large enterprises now account for 27.1% of the total value of B2B invoices. In contrast, on time payment of B2B invoices issued by micro enterprises decreased 23% on average. The average time it takes to convert invoices into cash ranges from 45 days from the invoice date for SMEs to 39 days for large enterprises.

…and have the highest percentage of uncollectable receivables

SMEs recorded the highest proportion (2.3%) of B2B receivables written off as uncollectable. The average for micro enterprises is 1.6% and for large enterprises is 1.5%.

USA

Large enterprises set the longest average payment terms

Respondents from large enterprises in the U.S. extended the longest and those from micro enterprises the shortest average payment terms to B2B customers (averaging 30 days and 21 days from the invoice date, respectively).  

Large enterprises wait the longest to receive payment on overdue invoices

Over the past year, large enterprises in the U.S. recorded the highest increase in the proportion of B2B invoices paid on time (+20% on average). Due to this change, overdue invoices in large enterprises now account for 27.4% of the total value of B2B invoices. In contrast, on-time payment of B2B invoices issued by SMEs decreased 13% on average. Despite these changes, large enterprises are still the slowest to collect payment of invoices. The average time it takes to convert invoices into cash is 51 days from the invoice date for SMEs and 69 days for large enterprises.

SMEs recorded the highest rate of uncollectable receivables

Despite collecting payment of invoices faster, SMEs have a significantly worse track record when it comes to collecting payment. SMEs in the U.S. recorded the highest proportion (2.0%) of B2B receivables written off as uncollectable. The average for large enterprises is 1.3% and for micro-enterprises less than 1%.