Manufacturing & Supply Chain Management

Late Payments in Manufacturing: Insights into the Industry's Latest Challenges

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No business, regardless of size, intentionally restricts cash flow or jeopardizes long-term profitability. Yet, extended payment terms continue to pose challenges, hinting at potential cash flow issues.

Late payment of invoices and prolonged payment cycles are significant barriers to growth, particularly for SMEs. Today, late payments are not just an occasional hurdle, but they are increasingly becoming the norm. Research from PwC indicates that the average invoice now takes 54.1 days to settle, marking a 7% increase from the previous year and reaching a five-year high.

Manufacturing firms are among the hardest hit. A 2023 study by Taulia surveyed 11,300 suppliers, revealing that over half experienced delayed payments from their customers. Looking ahead to 2024, uncertainties such as global conflicts, including the recent Red Sea attacks, are expected to exacerbate the issue, potentially leading to even more suppliers facing delayed payments.

Chapter 1

How do late payments disrupt the supply chains?

Long before extended payment terms became prevalent, late payments were described by Supply Chain Dive as a form of ‘financial bullying,’ often employed by large retailers and businesses. This tactic can severely impact suppliers which lack the financial cushion to weather cash flow crises effectively, quickly creating complex challenges that permeate supply chain operations, affecting cash flow and credit resilience.

Unsurprisingly, SMEs lack the extensive financial reserves that larger companies possess to navigate such problems and find themselves accepting extended payment terms, forcing them to revise budgets and seek additional financing to bridge financial gaps.

Even a minor delay in payment can disrupt their operations. To manage these challenges, SMEs frequently resort to unfavourable credit options such as high-interest loans or lines of credit. This financial strain can force drastic measures, including reduced investments, staff cuts, and delayed payments to their suppliers, all of which can quickly snowball across their supply chain.

For instance, consider a manufacturing company heavily reliant on prompt payments from key clients. Delays in these payments may prevent the manufacturer from purchasing necessary raw materials, disrupting production schedules and straining client relationships. The delayed payments trickle through the supply chain, impacting a supplier's ability to pay their ‘tier-n’ suppliers further upstream.

The biggest companies with the deepest pockets must realise that if they delay payments or offer unfair extended payment terms the whole of their supply chain suffers.

Liz Barclay
Small Business Commissioner at Barclays
Chapter 1

What factors are causing late payments to rise?

Late payments have surged at a time when prompt cash flow is more crucial than ever. According to research by CPA, there has been a staggering 209% increase in late payments since the onset of the COVID-19 pandemic in 2022.

Late payments have been exacerbated by broader economic conditions. The pandemic, a worsening economic climate, and a rising cost-of-living crisis have inflated everyday expenses. Amid these pressures and the threat of a global recession, businesses worldwide are facing a growing late payment crisis.

Late payments are a problem impacting businesses globally. 87% of businesses report that their invoices are typically paid after the due date and a further 35% of invoices are paid more than 30 days after the invoice due date.

Payment date breakdown

Payment date breakdown

Covid cash flow crisis

 

Late payments have long plagued the supply chain sector, with over $5 trillion globally tied up in unpaid invoices reported as early as 2019. This backlog has hindered companies worldwide, causing disruptions in supply chains and impeding access to funding from traditional banks.

The COVID-19 pandemic worsened payment behaviours towards suppliers. Local disruptions, soaring overhead costs, and economic strain increased financial demands on businesses while making capital harder to access. In response, many businesses prioritised safeguarding their working capital and cash reserves over timely supplier payments. Consequently, late payments surged as businesses navigated the uncertain economic landscape.

Stragetic late payments

According to research published in Chicago Booth Review, many large businesses strategically choose which suppliers to pay late and for how long. Typically, companies prioritise timely payments to larger, more critical suppliers while delaying payments to less essential suppliers. This practice is prevalent among businesses with significant market share and industry influence.

The decision-making process behind late payments is structured to maintain and strengthen relationships with key suppliers, ensuring the smooth operation of business activities. By prioritising payments to crucial suppliers, businesses aim to uphold operational efficiency and manage their cash flow effectively.

Late payments is the single biggest cause of business failure. We want to unite the small business community in tackling this issue and raise the social conscience of larger businesses who don’t pay on time.

Hannah Bernard
Head of Business Banking at Barclays

Late payments by industry 

Late payments by industry

This strategic cost-shifting tactic allows businesses to temporarily alleviate financial gaps by withholding payments from upstream suppliers while awaiting payments from downstream customers. This approach helps them manage their working capital more efficiently during uncertain economic periods by temporarily plugging financial gaps.

In 2024, the 'Good Business Pays' Slow Payment Watchlist highlighted major retailers like Coca-Cola and Ab InBev for significantly delaying payments, some exceeding 100 days. Parent companies such as Reckitt, maker of Air-Wick, and Mondelez, owner of Cadbury, were also noted for delaying payments up to 126 days and 99 days, respectively.

Rising costs and geopolitical tensions

Many manufacturers are facing a convergence of challenges stemming from rising overheads, late payments from customers, and geopolitical tensions beyond their control, plunging numerous businesses into financial turmoil.

Since the end of the Cold War, supply chains have evolved into complex global networks spanning borders, languages, and time zones. This expansion has allowed manufacturers to optimize costs by sourcing from cheaper suppliers and utilizing efficient logistics. Enabled by low-cost sourcing, manufacturers enjoyed a period of significant growth that enabled them to thrive and compete on a global scale.

However, this interconnected web is vulnerable to risk. It relies heavily on geopolitical stability and low trade barriers. Recent geopolitical tensions, such as Russia's actions in Ukraine have disrupted global stability, with governments quick to react with a wave of sanctions and trade restrictions that have isolated Russia economically, impacting global supply chains.

Similarly, allegations of forced labour practices in China have prompted protective measures and trade bans from several trading partners, forcing manufacturers to seek alternative sourcing to protect their reputations and comply with human rights standards.

Moreover, disruptions in major trade corridors have compounded challenges. Issues like the Panama Canal draught where the government restricted capacity to 24 daily slots and conflicts in the Red Sea as retaliation to the Israel-Hamas war have diverted shipping routes and increased shipping costs and delivery times dramatically.

These crises have far-reaching implications, not only for the shipping industry but also for the environment and the global economy. The longer routes that the ships are required to take due to the Red Sea and Panama Canal crisis have significantly increased the distances for cargo and freight vessels by up to 53% according to research by World Bank, causing a steep rise in CO2 emissions. From an economic perspective, it has led to increased shipping, handling and insurance rates, fuelling global inflation and hampering regional and international shipping economies.

This comes as no surprise. In 2024, the Wall Street Journal predicted that freight, logistics, and ocean carriers would bear the brunt of late payments as these disruptions persist. These challenges exacerbate payment delays and disputes for suppliers across the globe.

Firms will be operating more complex structures in more complex jurisdictions, as the price of creating resilience against unpredictable political tensions.

Mark Weil
CEO at TMF Group
Chapter 1

How can suppliers avoid late payments?

Continuous monitoring for long-term financial health

As the saying goes, prevention is better than cure, and this holds especially true for avoiding late payments. The post-pandemic world is rife with unfair trade practices and payment policies that favour market monopolists. To stay resilient, businesses are now adopting more robust and stringent credit control frameworks to build resilience against rising late payments.

These frameworks enabled by technology include the continuous monitoring of customer information. This proactive approach to risk ensures businesses stay ahead of potential changes in their client's financial health, allowing for timely interventions, reducing the risk of late payments, and strengthening cash flow resilience.

Automated due diligence solutions, like Creditsafe’s Accelerator platform can streamline this process, transforming time-consuming checks into instant, data-driven decisions about your customers and payment terms. Seamlessly embedded into your existing tech stack, it allows for swift and accurate decisions, with instant alerts based on predefined policies that notify teams of critical changes such as overdue payments, credit score fluctuations, and outstanding invoices.

KYC Protect

Using the tool gives us peace of mind in a matter of minutes. It allows us to monitor exactly what’s going on behind the scenes and helps us decide what approach to take before proceeding on a new project

Robert Walton
Project Sales Manager at Solarux

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