As global economic uncertainty rises, businesses in Singapore have reported a sharp rise in the rate of B2B debt write-offs: up one-third from 1.8% of receivables in 2018 to 2.4% now.
At the same time, Singaporean businesses are making much greater use of trade credit, with nearly two-thirds of the value of B2B sales now conducted on a credit basis, a far higher rate than the regional average of 55.5%. A year earlier, the figure for Singapore was 50.7% - as our new annual survey on Asia-Pacific payment practices has noted. This trend is also evident across other Asian countries including China. Given the increasingly difficult business climate, it is understandable that more businesses are extending credit to customers.
However, the increasing use of trade credit has been accompanied by a worrying one-third rise in bad debt write-offs, a problem that businesses need to address strategically.
One of the most effective solutions is trade credit insurance, a product in whose benefits we at Atradius, as a global leader in the field, are well-versed: it protects your business from payment defaults from customers, and maintains cash flow and financial stability.
The rise in bad debts and the increased use of trade credit come at a time of heightened tensions between China and the US, with trade talks (at the time of writing) concluding without a deal, and with both sides imposing tariffs.
As a country that is highly dependent on global trade – to say nothing of its deep integration within the Asian supply chain – Singapore’s exporters are more vulnerable than most to an escalating trade dispute.
Cash(flow) is king
For Singaporean businesses engaged in B2B trade, this array of factors – rising bad debt rates, greater use of trade credit, and increased trade tensions - reinforces the fact that more ought to consider trade credit insurance.
In fairness, many Singaporean businesses are aware of trade credit risk: 53% said the key element of their credit management policy was to assess prospective buyers’ financial profiles.
Rather than take out trade credit insurance, some businesses are trying a different tack: 52% said they would check their customers’ creditworthiness and request that invoices be paid more often in cash or cash equivalents in the next 12 months. While a pre-sale check is prudent, it is not a guarantee of payment and still carries a high degree of credit risk. Likewise, by asking customers to pay in cash, businesses risk losing them to a competitor who is willing to offer a credit extension.
Credit risk – our stock in trade
It is for these reasons that many others continue to offer trade credit which can help companies grow their business by increasing sales and building trust with customers. Our survey found that micro-enterprises offer the most generous payment terms at 31 days from invoice date. That is three days longer than the period that SMEs and large enterprises offer, and shows the leverage buyers enjoy in extracting more favourable terms from smaller operators.
Interestingly, the numbers also show that micro-enterprises are much better at collecting on their invoices than their larger peers – in part, we believe, because circumstances compel them to do so. Micro-enterprises not only recorded the highest increase in the proportion of B2B invoices paid on time; they also reported the lowest bad debt rate of B2B receivables – just 1.4%. The rates reported by SMEs and large enterprises were twice that.
It is also true that different sectors are more exposed to trade credit risks than others. The ICT/electronics sector, for instance, reported that 41.6% of invoices by value were overdue last year – that was well above the rates for manufacturing (35.8%), wholesale/retail/distribution (32.1%), machines (25.5%) and services (21.8%).
Businesses that suffer cash flow delays or that have to write off invoices have limited options in making up that gap; many will turn to their bank for financing on the assumption that they can borrow. Will that always be available? Not in all cases. Worryingly, then, 43% of respondents would cut jobs if they were refused credit.
Again, trade credit insurance can help, removing fears about client insolvency and protecting your business from payment default risks. Assuring on-time cash flow creates a healthier balance sheet, helps to avoid a liquidity squeeze and may even lead to receiving better financing terms from your lender.
At Atradius, credit insurance is our stock-in-trade. Allowing us to focus on your trade credit risk allows you to focus on what you do best: expanding your business, your clients and your markets. So, in these uncertain times, let us help you trade with confidence.