Late and default business payment stabilising

70% of enterprises finding financing easier to obtain despite caution on rising materials cost and deteriorating payment performance within the clothing and electronic industries.

A survey of payment experiences among Hong Kong businesses during the third quarter of 2010 – conducted by Coface, the leading international credit insurance and credit management services group – has revealed that both late and default payments are stabilising, and over 70% of Hong Kong enterprises consider it is easier to obtain financing this year than during last year.

According to the survey, 22.1 percent of respondents experienced late payments from buyers in the third quarter of 2010 – 4.6 percent higher than in the previous quarter (21.1%), showing a slight rebound after the declines in six successive quarters since Q1 2009. Also, 5.0 percent of respondents reported default payments by buyers in Q3 2010, essentially unchanged from 4.9 percent in the previous quarter, according to a Coface report.

“Despite the slight rebound, we believe that payment performance is stabilising, though our latest forecasts revised the 2010 global growth upwards (from 3.7 to 3.9%), and the 2011 growth downwards (from 3.5 to 3.4%) due to the slow recovery in the United States and Europe ,” said Richard Burton, Regional Managing Director, Coface Greater China.

Caution on rising materials cost and downturn in payment performances within clothing and electronics industries
After remaining high but stable for three successive quarters, the level of default payments by companies in clothing and accessories industries reached 21.5 percent in Q3 2010 – 25.7 percent higher than the previous quarter (17.1%). In addition, there was the second consecutive increase in payment delays in the electronics industry, reported by 11.8% of respondents for in Q3 2010, up from 9.6% the previous quarter, and 8.5% in Q1 2010.

“The major consumers of these two industries are in the United States and Europe, where the economic recovery remains slow with continual fragility in the corporate sector.” said Burton.

Among the respondents who regard poor business performance as the main reason for default payments, 45.8% think the impact of higher raw materials prices is the main factor leading to poor business performance – 37.5 percent higher than the previous quarter (33.3%). “The low-value added industries are especially hard hit by rising raw materials prices,” said Burton, “One of the obvious examples is cotton. Its price rose more than 40% this year, due to export restrictions implemented by India, and the serious flooding suffered by China and Pakistan, the major producing countries. The clothing industry is the first to be affected.”

Steady economic improvement in Hong Kong
There were signs of steady improvement in Hong Kong’s economy. For the first nine months of this year, the value of total exports of goods rose by 26.1 percent over the same period in 2009.

“We are waiting for the results of the Christmas sales period to review the real recovery situation,” Burton added.

”The continuing low-interest rate environment is favourable to the overall recovery and is forecast to be maintained in 2010 and onwards. But this may be offset by the soaring costs of raw materials and the pressure of RMB appreciation, which will have detrimental effects on enterprises’ business performance. Therefore, local businesses are strongly recommended to keep closely monitoring buyers’ payment records and financial situations, in order to avoid unnecessary harm to profitability and cash flow.”

Improving financing environment with increased adoption of factoring
The survey reveals that 70.7% of respondents consider it is easier to obtain financing this year than during last year. As costs of raw materials will continue to soar in a continuing low-interest rate environment in the coming year, it is expected that more enterprises will look for financing service to improve their cash flow.

“We see very high potential for growth in factoring as an effective financing solution during the coming year, as the economy continues to improve and enterprises need extra funding to build and expand their businesses,” said Burton.

According to Factors Chain International (FCI), a global network of leading factoring companies, Hong Kong’s total factoring volume grew around 5% from 2007 to 2009, reaching HK$87 billion (€8 billion) even there was a financial crisis in 2008.

Factoring is a financing device without the need to provide fixed assets as guarantees. It enables a business to convert accounts receivable into immediate funds for business development, instead of waiting for payment when a receivable is due.

To enhance its product portfolio – credit insurance, business information and debt collection – Coface launched a factoring service in early 2008, becoming the first credit insurance company in Hong Kong that also provides a factoring service. “With our comprehensive global network, we can swiftly respond to customers’ factoring needs as well as delivering a one-stop solution on credit management,” said Burton.

The survey of 1,303 Hong Kong companies was conducted from July to September 2010, by Coface Greater China Services – the business information and credit management services subsidiary of Coface. The survey considered trends in late payments and defaults, as well as credit terms for manufacturing, trading services and contracting companies.