Reducing the risk of delayed payments

Delayed payments are on the rise across China, but there are solutions that sellers and suppliers can implement to alleviate this bone of contention, such as trade credit insurance

Payment delays to sellers and suppliers are becoming an increasingly common feature of doing business in Asia's largest economy.

That's according to a survey on China-based companies undertaken by trade credit insurer Coface. According to the insurer, respondents experiencing payment delays exceeding 120 days increased to 26% in 2017, up from 19% in 2016. Average payment terms increased from 55 days in 2012 to 76 days in 2017. Main causes of payment delays were: customer/buyer financial difficulties (49%), management problems (12%), and attempts to delay payments (10%).

Aiming to reduce the risk of buyer bankruptcy or insolvency on payments, suppliers can look to a couple of solutions for support, this includes supplier finance programmes. Under a supplier finance programme, a buyer typically uses a financial institution to extend their payment terms with suppliers while at the same time allowing suppliers to get their funds earlier by being paid by the financial institution instead of the buyer.

While useful in strengthening the relationship between the buyer and supplier, it is still quite a new solution for companies in Asia. "We are still in an education process with local large corporates. I think the demand from suppliers on supplier financing is there. In the Asian context a fair amount of these relationships with the suppliers has been to the advantage of the large buyer. They have been quite happy to stretch delayed payments to suppliers without having to incur any costs," shares a transaction banker for an international bank.

Moreover, it is often viewed as a burdensome process for buyers who don't have the resources to handle such financing arrangements. "It is quite a manual and time-consuming process at the moment on a payables deal depending on how many suppliers you want to onboard you may end up negotiating with hundreds of different suppliers, often they will all have a difficult view on a document and they will all have different arrangements in place," says Christine Hilder, special counsel at Clayton Utz at The Asset's supply chain finance roundtable event.

Alternatively, trade credit insurance can help reduce the uncertainty around late payments. Under a general policy arrangement, trade credit insurers will pay out a percentage of outstanding debt to a supplier if a buyer defaults or is extremely late on their payments. A creditable safeguard in theory, using trade credit insurers, however, may see suppliers taking greater risks selling to buyers who act in bad faith, such as behaviour with an intent to deceive. In addition, trade credit insurance may have some limitations that may not always cover specific industries.