If there is one thing that is clear looking back over the past year and a half, it is that Covid-19 and the pandemic recession have created uncertainty and instability for businesses around the world. This reality is well documented in the results of the USMCA Payment Practices Barometer (PPB) survey published in July by the trade credit insurer Atradius.
The report details the experiences and perspectives of companies across the USMCA region, that is, the United States, Canada and Mexico. One of its lessons is the drastic difference in optimism felt by the leaders of the different countries in the region. Most respondents in Mexico expect business performance to improve in the coming months. In Canada, this picture is reversed, with a minority expressing optimism. American leaders, for their part, have a fairly neutral outlook.
The shift in outlook represents a microcosm of what is happening around the world as businesses emerge from the pandemic recession. Two months after the report was published, the Covid-19 pandemic continues to evolve, with cases increasing faster than vaccines are given and new variants of the virus spreading. Nonetheless, the USMCA PPB report provides a clear picture of where businesses in the region are heading in the last quarter of the year.
Soaring credit management costs
For businesses across the USMCA region, the cost of managing accounts receivable has increased dramatically over the past year and a half. The largest increases in these costs have been reported by companies that handle credit and collections internally.
The main cause of the increase in costs is probably the increasing proportion of credit sales. Essentially, extending credit to more customers means businesses must devote more resources to managing credit risk. On the other hand, rising credit management costs can also indicate a deteriorating risk environment, as the longer an invoice remains unpaid, the more resources the business must deploy to collect it. Some companies have started to outsource credit management for cost certainty, regardless of what is happening in the external environment.
The pandemic and the resulting supply chain disruptions around the world have certainly increased business risks. Many aspects of the external business environment are unpredictable, and the black swan event of the Covid-19 pandemic has proven that businesses need to take a proactive approach to mitigate the uncertainties inherent in doing business. As insolvencies hit an all-time high due to the pandemic, companies with strong credit management processes were better prepared to avert disaster.
Domestic credit sales dominate
Overall, the USMCA region has seen more domestic credit sales than foreign credit sales since the Covid-19 outbreak. Sixty percent of survey respondents prefer to extend credit nationally rather than selling on credit to buyers in other countries. This is likely due to supply chain challenges brought on by the pandemic, although cross-border trade may resume by the end of the year.
While the pandemic persists and economies continue to face threats from protracted advances in immunization and newer variants of Covid-19, businesses in the USMCA region are on the verge of a steady recovery This year. Additionally, more than a third of USMCA businesses have given customers more time to pay and settle their bills in the past year. Our research indicates this was most often the case in the United States, followed by Mexico and Canada. These results vary from industry to industry: the IT, communications and electronics industry offered significantly more flexible payment terms, while the food and beverage and chemical / pharmaceutical industries significantly shortened payment terms over the years. Covid-19.
The pandemic and the abnormal supply chain disruptions of the past 18 months have obviously influenced this change in payment terms. The terms offered by the supplier’s own suppliers and the credit standing of the customer company both had an impact on changes to the payment terms for a given transaction. Survey respondents also mentioned trade credit insurance as an important factor influencing their payment terms. About a third of U.S. businesses said insurance allowed them to offer more competitive terms to customers.
Perhaps due to softer payment terms, US businesses struggle with more late payments and cancellations than their USMCA counterparts. On average, 41% of businesses in the region reported a deterioration in customer payment practices over the past year. Much of this is because payment terms have eased to ease the burden businesses feel during the recession.
An optimistic outlook
In the USMCA region, 59% of respondents are optimistic about improving their business performance before the end of the year. However, there is a significant disparity from one country to another. Mexican executives are extremely optimistic, 81% anticipating growth, while only 36% of Canadian survey respondents are optimistic about their business outlook for the remainder of 2021. In the United States, the split between those planning to grow in second half compared to. those that don’t is around 50/50.
Much of the contrast between Canada and Mexico reflects the origin of each country. While Canada was doing well economically before the pandemic and businesses received excess federal aid amid the recession, Mexico experienced just the opposite. Not in an economically stable position at the start of 2020, Mexican businesses have been hit hard by the pandemic. Government support was also less generous there than in other USMCA countries. These factors have combined to depress the expectations of Mexican businesses, making any prospect of improvement optimistic.
Only time will tell how the pandemic recovery unfolds from here, as vaccines continue to be administered to deal with the discovery of any new variant of Covid-19 and governments withdraw the economic supports that have maintained many businesses afloat during these difficult times. As the world slowly returns to normal, businesses in the USMCA region will continue to assess their risk in new situations and adjust their overall optimism for the future to reflect any new developments that may arise.
Aaron Rutstein is vice-president and regional director of risk management services at Atradius in the Americas.