The risk of payment default increases considerably

• Companies around the world are paying their bills later and later. On average, the global DSO (the number of days between issuing an invoice and collecting it) has increased by 3 days to reach 59 days in 2023, the highest increase since 2008.
• Companies around the world are increasingly reliant on working capital to fund day-to-day operational activities. Converted into days of sales, the global WCR (working capital requirement) has increased by 2 days to reach 76 days in 2023, the third consecutive increase.
• In Europe in particular, companies are likely to have to wait even longer for their money in the years to come. This is due to falling profits and ever-rising operating costs. As a result, the risk of default is increasing.
• Europe wants to reduce payment periods. But reducing the payment period from 60 to 30 days (in a binding manner) will lead to financing problems for many businesses.

According to Johan Geeroms, our Director of Risk Underwriting Benelux, European companies are experiencing increasing difficulties with the working capital they have available for their day-to-day operational activities. "They are finding it harder to obtain credit, and the associated costs have also risen. Added to this is the fact that margins are shrinking to a large extent. Companies are looking for extra room to manoeuvre. For example, by paying invoices later. In this way, their suppliers act as financiers. But if all companies do this, it creates a snowball effect. As a result, payment problems and defaults will become increasingly common.

Our study shows that global working capital requirement has increased for the third consecutive year. Converted into days, this equates to 76 days of sales in 2023 (+2 days compared to 2022), driven by weaker economic growth and higher operating and financing costs. Despite differences in economic dynamics around the world, the continued rise in WCR appears to have become widespread across the major economic regions.

Overall, half the countries in our sample show an increase in WCR in 2023, and two out of five countries exceed the world average, namely France (+5 days) and Germany (+5) in Western Europe, and China (+3 days) and Japan (+3) in Asia-Pacific. At the end of 2023, WCR stood at 81 days in Asia-Pacific (+2 days), 69 days in Western Europe (+1 day) and 70 days in North America (+1 day).

Days sales outstanding (DSO) has emerged as the main factor in the increase in WCR, rising by 3 days to 59 days in 2023. This is the biggest increase since 2008 and almost double that of 2022. This means that more and more businesses are waiting longer to be paid, which increases the risk of cash flow problems. At the end of 2023, 42% of companies worldwide had payment terms in excess of 60 days' sales.

In Europe, 44% of companies were above the world average. In Asia, we found that 46% of companies were above the global average. In North America, 33% of companies were below the average. Nevertheless, almost all of the 22 sectors that we track at global level saw their DMP increase in 2023. As a result, among other things, of excess inventories, WCR increased in transport equipment (114 days' sales), electronics (114) and machinery (113). Next come textiles, pharmaceuticals, metallurgy and chemicals, all of these sectors facing a WCR of more than 90 days.

Addressing the increasing delays in paying invoices is crucial to the resilience of European businesses. The European Commission's proposal in this regard could see payment terms in Europe reduced from the current recommended 60 days to a (binding) 30 days. The European Parliament has added that 60 days remains possible if contractually agreed (and that 120 days may also apply for specific goods). Despite this relaxation, which makes the measure less drastic, the financial flexibility of businesses is considerably reduced.

According to our study, in the fourth quarter of 2023, 40% of European businesses had exceeded the 60-day limit for paying their invoices. The new measure puts many businesses in a "financing gap". From a macroeconomic point of view, this also has a significant impact.

To reduce payment periods to 30 days, European businesses would need 2 billion euros in additional financing. At current interest rates, this would increase corporate interest payments by 100 million euros. This would be equivalent to a margin loss of -2 percentage points. In addition, overly rigid payment periods can jeopardise the competitiveness of European SMEs by encouraging companies to turn to suppliers outside the EU. In this context, political decision-makers should consider the possible negative effects.

Johan Geeroms concludes on the subject of the rise in days sales outstanding (DSO): "Invoices paid later and later are particularly problematic, especially for SMEs. The customer is taking more and more of the money that belongs to you. SMEs don't have the room for manoeuvre they need to manage this situation smoothly. What's more, this situation is not without risk, as deferral can ultimately turn into abandonment. Many companies are afraid to put pressure on their customers. We know from experience, however, that it is both professional and very wise to react proactively as soon as the payment deadline is exceeded. Call the company and ask why no payment has yet been made. Show that you don't want to waste time. In this way, you can ensure that you are among the first to be served when the payments are made. Every healthy company has a strict accounts receivable policy.