Executive Summary
Corporate financing constraints hit a record high in 2023, mainly driven by the largest jump in payment terms since 2008. Global Working Capital Requirements (WCR) increased for the third consecutive year, reaching 76 days of turnover, driven by softer economic growth and higher operating and financing costs. This called for longer payment terms (Days Sales Outstanding rose by three days to 59), notably in Asia and North America, while in Europe, the inventory glut and associated costs explained 60% of the rise in WCR.
Globally, 42% of companies posted payment terms above 60 days of turnover at the end of 2023. In Europe this share was in line with the global average, while it was above in Asia (46%) and below in North America (33%). All sectors have seen increasing payment terms, but the inventory glut has pushed WCR higher in some sectors: Transport equipment (114 days of turnover), electronics (114) and machinery equipment (113) rank the highest, followed by textiles, pharmaceuticals, metals and chemicals – all with WCR above 90 days.
The ongoing profitability squeeze sets the stage for payment terms to deteriorate further, especially in Europe. Our panel model shows that margins are the key determinant of payment terms, more impactful than financing or the business cycle. We find that a -1pp drop in profitability increases payment terms by over seven days. In this context, with profitability likely to be squeezed in 2024, European corporates should brace for longer payment terms.
Addressing late payments is key to build resilience for European corporates, but the devil is in the details. The European Commission’s proposal for a EU Late Payment regulation suggests that payment terms could be reduced from the current recommended 60 days to 30 days binding. While the European Parliament has incorporated an extension to 60 days if agreed by contract or to 120 days for specific goods, it still brings significantly lesser business flexibility compared to the current terms and is likely to increase the financing gap for more than 40% of European companies paying after more than 60 days as of Q4 2023, resulting in a significant macroeconomic impact. To reduce payment terms to 30 days, European companies would need EUR2trn in additional financing. At current interest rates, that would increase corporates’ interest payments by EUR100bn, the equivalent of a -2pps loss of margins. Ultimately, boosting corporate profitability by lowering costs (labor, taxes, financing) could go a long way in improving payment culture in Europe.