U.S. business debt is on the rise, and companies are also having a harder time paying it off.
Credit monitoring and risk management firm Creditsafe surveyed more than 200 finance professionals and found that many companies have taken on debt post-COVID as interest rates remained low, but they’re also not doing enough to preserve their cash as they instead choose to focus more on adding new customers to increase revenue. Companies can lessen potential risks by conducting business credit checks and by keeping tabs on fluctuations in how long firms take to pay their bills.
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A report by Janus Henderson Investors said companies worldwide took on a record $456 billion of net new debt in 2022 and 2023. That pushed outstanding net debt up by 6.2 percent to $7.8 trillion, on a constant-currency basis. But S&P Global also found that corporate debt defaults rose by 80 percent in 2023, a problem that could surface again in 2024.
So why are businesses having a hard time paying off what they borrowed?
One finding from Creditsafe’s study found that just 5 percent of companies said reducing debt is the most important part of growing their business. That’s in contrast to 52 percent who said adding new customers and increasing revenue were most important.
That doesn’t mean companies aren’t aware of the need to get themselves out of spiraling debt as 68 percent of business said they have increased their bad debt reserves by setting more money aside to cover receivables that might not get paid by customers. But Creditsafe found that firms should be more proactive and diligent in protecting their cash flow. The survey found that nearly half, at 49 percent, don’t use credit risk software to run checks on new customers. Creditsafe equates that with “throwing cash away instead of preserving it.” And only 23 percent ask for trade references, which means 77 percent don’t ask at all.
Missed customer payments are also becoming a bigger problem for businesses, with just 14 percent of respondents stating that most—76 percent to 100 percent—of their invoices are paid on time. Thirty-nine percent said invoices are paid 1 to 30 days past payment terms, while 46 percent said their customers paid invoices 31 to 60 days past payment terms. Fifteen percent said their customers paid invoices 61 to 90 days past payment terms. Thirty-five percent of respondents said that in the last 12 months the most common reason customers didn’t pay their invoices within payment terms was due to cash flow issues.
The problem here for businesses that have net 90 payment terms is that customers who have a days beyond terms (DBT) range of 61 to 90 days could translate to a wait time of six months before receiving payment, a timeline that would impact a company’s cash flow. Creditsafe said running a business credit check to see how a customer’s DBT has fluctuated over the last 12 months can provide insight to trends and patterns indicating larger financial problems.
Providing trade credit isn’t necessarily a bad thing. Selling on trade credit means a company can potentially generate more revenue in the long term. But they also need to know that giving up a portion of a company’s cash flow until payment is made is one of the risks of trade credit. Of those surveyed, 64 percent extend trade credit to up to 30 percent of their total portfolio, while another 25 percent extend trade credit to between 31 percent to 50 percent of their customers. Thus, if customers don’t have strong financial healthy and end up paying their invoices late, the end result could be liquidity issues for the company providing the trade credit.
Liquidity issues can take a toll on companies, even pushing them into bankruptcy. The Creditsafe report cited fashion retailer Express Inc. as an example of how rising debt can take a toll on the bottom line. Express had a consistent problem with late payments, due to its crippling debt load and declining sales. “Even if revenue improved, the fact that Express couldn’t get its debt under control is what ultimately led to its demise,” the report concluded. Express filed for Chapter 11 bankruptcy court protection this past April. It ultimately was acquired out of bankruptcy for $174 million by investment group that included brand management firm WHP Global and three of its key store landlords, Simon Property Group, Brookfield Properties and Centennial Real Estate.
A separate study earlier this year by trade credit insurance firm Allianz Trade indicates that reconfiguration of supply chains and geopolitical tensions, as well as non-payment risk, are top of mind concerns for global exporters.
Signs of a possible credit crunch appeared in April 2023, and that became particularly true in the home retail sector where it saw a high number of bankruptcy filings. More recent Chapter 11 filings in home include Conn’s, Big Lots, and LL Flooring. Trade credit insurers, who ensure that suppliers get paid for goods shipped to retailers, also can provide insight to companies in the supply chain. One example was in July 2023 when several of them pulled back on their coverage to British fashion e-tailers Boohoo and Asos.
