The use of trade credit in B2B transactions enhances financial flexibility and mitigates negative effects of increased global competition for Hong Kong's large enterprises and SMEs.
Hong Kong’s economic growth is forecast to slow down this year, mainly due to weaker demand from China and increased uncertainties stemming from trade tensions between China and the US. Slower export growth, along with tighter credit conditions, are expected to cause a slight (2%) increase in insolvencies this year. 3 in 5 respondents in Hong Kong expressed concern about this, saying that more difficult access to bank financing would force them to delay investment in the business and to restrict growth due to lack of capital.
Concerns over economic slowdown and financial market tightening increase use of trade credit in B2B transactions
Compared to last year, survey respondents in Hong Kong appear more inclined to sell on credit terms than on a cash basis to their B2B customers. This year’s survey findings show an increase of approximately 17% in the volume of B2B sales transacted on credit. 56.8% of the total value of Hong Kong respondents’ B2B sales was transacted on credit (up from 48.8% last year) while 43.2% was made on a cash basis (down from 51.2% one year ago). With the domestic economy slowing, the financial market tightening and uncertainties surrounding global trade and tariffs, respondents in Hong Kong seem to be focussing on protecting their competitive position, both domestically and overseas, by adopting a more liberal trade credit policy.
B2B customers are requested to pay invoices notably faster than one year ago
The increase in sales on credit observed in Hong Kong is not linked to the extension of more relaxed payment terms from respondents. Based on survey findings, payment of invoices is requested on average 5 days earlier than last year, namely within an average of 27 days from the invoice date (below the 32 days average for the region). These are the third shortest in Asia Pacific, after Australia (24 days) and China (26 days). The tight payment terms set by respondents in Hong Kong are indicative of a strong perception of the customers’ payment default risk associated with credit sales and the more uncertain trading environment. As a consequence of more stringent credit terms, respondents in Hong Kong are now able to turn past due invoices into cash on average in 42 days, one week earlier than last year.
1 in 4 Hong Kong respondents will reduce their reliance on a single buyer over the next months to avoid risk concentration
Consistent with the heightened perception of the risk of payment default from customers, prior to any trade credit decision the attention of respondents in Hong Kong appears to be focussed on the assessing the prospective buyer’s financial profile. On average, respondents in Hong Kong (36%) check their buyers’ financials almost as often as their Asia Pacific peers do (39%). Once they make the B2B transaction, respondents in Hong Kong seem to use a balanced mix of credit management techniques. Reducing reliance on a single buyer was reported by nearly 25% of the respondents, compared to 20% at the regional level.
Higher insolvencies in Hong Kong expected cause value of overdue invoices to rise
An average 35.0% of the total value of B2B invoices issued by survey respondents remained unpaid at the due date. This is well above the 29.8% average for Asia Pacific. In order to avoid cash shortfalls due to late payment from customers, many respondents in Hong Kong (44% vs. 41% at regional level) reported they needed to delay payment of invoices to their own suppliers and to take various measures to correct cash flow (31% vs. 39% in Asia Pacific). More respondents in Hong Kong (26%) than at regional level (23%) reported they had to request a bank overdraft extension to alleviate the financial pressure on the business. Given the sharp focus on regularly checking customers’ creditworthiness, the proportion of bad debts written off as uncollectable (2.4%) remained almost in line with last year’s rate (2.2%). This compares to a 2.1% regional average. As mentioned earlier, a slight 2% rise in insolvencies is expected in Hong Kong this year.
1 in 5 respondents in Hong Kong will insure their receivables over the coming months
Most respondents in Hong Kong (60%) do not expect payment practices of B2B customers to vary over the coming months. The percentage of respondents anticipating an improvement (17%) is significantly lower than that of respondents expecting a deterioration (26%) in late payments and DSO. To protect their business against the risk of payment default by their B2B customers, 49% of respondents in Hong Kong will check their buyers’ creditworthiness more often and increase their bad debt reserves over the next 12 months. It is worth noting that 22% of respondents in Hong Kong reported that they are considering insuring their B2B receivables over the next months. This would increase the value of their trade receivables in negotiating finance terms with banks.
Overview of payment practices in Hong Kong
By business sector
Average payment terms longest in the manufacturing and consumer durables sectors. Shortest in the services and construction sectors
Respondents in Hong Kong from the manufacturing and the consumer durables sectors extended the longest average payment terms to their B2B customers (averaging 30 days and 32 days from the invoice date respectively). Respondents in the services and in the construction sectors extended the shortest average payment terms (averaging 24 days and 21 days respectively).
Financial impact of late payments highest in the wholesale/retail/distribution and the consumer durables sectors
The wholesale/retail/distribution and consumer durables sectors in Hong Kong are the most impacted by late payments. The value of overdue invoices in these sectors averages 39% of the total value of respondents’ B2B invoices. This compares to an average of 33.0% for the manufacturing sector and 32.0% for the services sector. The agri-food sector recorded the highest average value (39.3%), while the ICT/electronics sector recorded the lowest value (32.6%).
Credit insurance can provide protection against large concentrated exposures that might otherwise exacerbate bad debt reserves
Percentage of bad debts written off as uncollectable highest in the manufacturing and consumer durables sectors
With an average of 3.1% of B2B receivables written off as uncollectable, the manufacturing and consumer durables sectors appear to be the most impacted by bad debts. At the other end of the scale, 1.6% of construction sector invoices were written off as uncollectable. Closer to the 2.4% average for the country, the wholesale/retail/distribution and services sectors reported a 2.3% and 2.1% write off rates respectively.
By business size
SMEs extended the most relaxed average payment terms to B2B customers
Respondents from SMEs in Hong Kong extended the longest and from micro enterprises the shortest average payment terms to B2B customers (averaging 30 days and 21 days from the invoice date respectively).
SMEs wait the longest to turn overdue invoices into cash
Over the past year, large enterprises in Hong Kong recorded the highest increase in the proportion of B2B invoices paid on time (+13% on average). Due to this improvement, overdue invoices in large enterprises now account for 35.6% of the total value of B2B invoices. This compares to an average 14.5% increase in on time payment of the B2B invoices of respondents from micro-enterprises, and an 11.4% increase in large enterprises. The average time it takes to convert invoices into cash is 46 days from the invoice date for SMEs, 39 days for large
enterprises and 36 days for micro-enterprises.
Bad debts written off at highest rate in large enterprises
Large enterprises in Hong Kong recorded the highest proportion of B2B receivables written off as uncollectable (2.9%). The average for SMEs is 2.5% and for micro-enterprises 1.7%.