Payment Delays: Their Reasons, Scale and Consequences

The paper discusses theoretical and practical aspects of a relevant and pertinent issue of the reasons behind late payments in B2B commercial transactions and their consequences. It aims at identifying reasons for late payments and pinpointing their economic consequences and costs. It also addresses the scale of the phenomenon, especially for payments overdue by more than 60 days, considered the most dangerous for regular performance of enterprises. The paper provides the results of studies on these aspects quoted in three most important reports by the following companies: Bisnode D&B, Atradius, Intrum Justitia. It formulates conclusions on both the reasons and consequences of late payments in B2B commercial transactions.


Introduction
The research problem discussed in the paper focuses on the identification of the reasons, consequences (effects), and scale of late payments in the Polish economy compared to other, mainly European, countries. Deferred payment arrangements are a popular solution widely applied in B2B transactions (in EU Member States they are used in almost 50% of B2B sales), which nevertheless imply a classical credit risk (late or no payment). Hence exposure to risk is an inherent feature in businesses which offer deferred payment arrangements to their clients. To many enterprises in Poland, the practice of postponing the deadline for payment is part of their everyday reality and it determines the level of risk involved in doing business. Untimely payments may lead to the loss of profitability, liquidity and even to insolvency, which often ends in bankruptcy. The scale of late payments remains to be big, in Poland and globally, which is confirmed by reports of companies, such as Intrum Justitia, Atradius or Bisnode Dun & Bradstreet. According to the Bisnode Dun & Bradstreet's report, in 2016 on average 62% of businesses in Europe declared payment delays. In Poland the proportion was 57.5% 1 . Late payments exert a negative or even highly destructive impact upon the performance of individual businesses, industries, sectors or economies. The issue is very important to participants or animators of economic reality. Hence, it remains a pertinent and attractive area of research explorations, both in theoretical (research) and practical (application) dimensions. The above premises were decisive for choosing this research area and identifying research problems. The paper contributes to better presentation and description of the main reasons and consequences of late payments and demonstrates their scale (in particular, payments overdue by more than 60 days 2 ) in Poland and in other countries.
Three research questions have been formulated to examine the subject: 1. What are the reasons for late payments? Are they universal or specific? 2. Is the scale of late payments the same or different in various countries? 3. What are direct and indirect consequences and costs implied by payment delays and payment backlogs? 1 Bisnode Dun & Bradstreet, Global Payments Performance Barometer 2017, www.bisnode.pl/ blog/terminowosc-platnosci…/barometr-platnosci-na-swiecie [Polish language version], accessed on 20 May 2017. 2 As payments delayed by more than 60 days produce the most negative outcomes.
These questions link directly to four main theses: 1. The reasons for late payments are universal across the globe and are not country-specific; neither are they specific for a particular size of business nor for the sector in which it operates. 2. However, the frequency with which the reasons for late payments occur depends on a geographic region, a country, size of a business, and the sector in which a business operates. 3. Payment delays produce diverse, yet only negative, consequences for business performance and growth, as well as for entire economies and societies. 4. Payments overdue by more than 60 days and uncollectible accounts are the most destructive for the stability and economic standing of companies suffering from late payments.

Reasons for Late Payments
Late payment is a payment that has not been paid on time, i.e. in which a payment delay is involved. A payment delay can be described as the amount of time that passes between the deadline for payment originally agreed by parties to a commercial transaction (e.g. in a contract) and the actual remittance of the payment that is due. Late payments can be divided into three groups: 1. late payments which have been paid, i.e. payments that have been made after the expiry of the deadline for payment specified in the contract; 2. late payments not yet paid -payments for which the payment deadline has expired but have not been made yet. In this case, the term overdue payment seems much more appropriate; 3. lost late payments -are payments not yet made that have been overdue for a long time and have become uncollectible because the clients (debtors) supposed to make them have gone, e.g., bankrupt. Late payments, as often believed, are not just the effects of erroneous (wrong, incompetent) business conduct, especially with respect to granting trade credit or cultural aspects determining payment morale 3 . Structures of business relations and cooperation chains within which businesses operate in specific sectors (economic power of suppliers and their customers), norms and hierarchies, relative market power, business cycle, financial infrastructure (financing available from banks), and the legal system (norms and regulations) are much more powerful determinants of the late payments phenomenon 4 . In an ideal world, where all solvent enterprises could have immediate and continuous access to finance from diverse sources, late payments would be very rare. Businesses offering deferred payment arrangements would take account of the risk directly in their operating costs and their partners, who realise these costs and benefit from such arrangements making payments as timely as possible. Obviously, such an ideal world is far from business reality, especially in the emerging markets 5 .
Thus, we may feel inclined to say that the reasons for late payments have their exo-and endogenous roots.
There are many different reasons involved. They may be due to a customer's bankruptcy, his/her bad will or market practices resulting from his/her market power (the client does not pay though his/her financial standing is good and (s)he could pay the liabilities on time), from disputes over the quality or characteristics of supplied products or services 6 .
When discussing the reasons behind late payments we must supplement theoretical considerations with the results of studies that explore the issue across countries and sectors, in which businesses of various sizes operate. We shall use data from reports by Atradius and Intrum Justitia, the companies that for more than a decade have been monitoring the reasons for late payments in European countries.
In the survey conducted by Atradius on payment delays in domestic B2B model in 2017, companies from Eastern and Western Europe most often selected Insufficient availability of funds as a reason why debtors were unable to make payments on time. The second most important reason given by businesses in Eastern and Western Europe was a purposeful strategy of Buyer using outstanding invoices as a form of financing (overdue liabilities). Interestingly, in Eastern Europe Formal insolvency of the buyer (bankruptcy) ranked third among the reasons for late payments. In Western Europe the same reason occupies the 6th position. Further three reasons are purely operational and link with errors in invoicing and mailing or with overcomplicated payment procedures. Thus, they are internal reasons, which may be eradicated by creditors if they put the right procedures in place. Another reason, i.e., Disputes over the quality of supplied products or services seems interesting and needs a closer examination. It may be part of a specific "game" played by the debtors to delay the payment, which would correspond with the second most often selected reason: Buyer using outstanding invoices as a form of financing (overdue liabilities) and with poor Administrative efficiency of Supplier (Creditor) -which may be both an external and internal reason. Undoubtedly, Inefficiencies of the banking system should be interpreted as an external reason. Tables 2 & 3 present the reasons for late payments reported by companies in Western and Eastern Europe against the sector in which they operate and their respective size. For the past 3 years, Insufficient availability of funds and Buyer using outstanding invoices as a form of financing were two main reasons indicated by micro, small, medium-sized and large companies. Hence, they are universal and common reasons independent of business size and sector.
When analysing the data from Tables 1-3, we may come to a conclusion that the reasons for payment delays are universal. Yet, specifically countries of Eastern Europe reported bankruptcy of their business partners as a valid reason for late payments from domestic B2B customers.
In the opinion of Polish enterprises, two universal reasons prevail with Insufficient availability of funds clearly gaining in importance in recent years.  What differs Poland from other Eastern European countries is a high percentage of Insufficient availability of funds answers, which scored higher only in Hungary. Formal insolvency of the buyer (bankruptcy) was also often mentioned as a reason for late payments; a higher percentage was reported only in the Czech Republic. Surprisingly, Complexity of payment procedure scored over 20%, similarly in Turkey, as most payments are online bank transfers for invoices sent mostly online.

Scale of Payments Delayed for over 60 Days
When it comes to payments overdue for over 60 days -which cannot be considered natural and pose a real threat to everyday business and to the survival of companies that experience them -Poland performs much worse than other countries. According to the studies conducted by Bisnode Dun & Bradstreet in 2016, as many as 20% of Polish companies suffered from payments delayed for over 60 days, which earned the country no. 2 position in this shameful ranking in Europe, immediately after Romania.
A less pessimistic outlook for companies whose receivables are late by over 60 days is painted by Atradius' survey. Its latest report shows that such delays were experienced by only 8% of companies in Poland.
Thus, it is worth juxtaposing the results of surveys conducted by the two companies with other surveys. According to Kantar Millwardbrown's survey commissioned by the BIG InfoMonitor at the end of 2016, 11% firms delayed payments for over 60 days 7 . On the other hand, statistical data from BIG InfoMonitor database 8 at the end of December 2016 indicated that 4.4% companies had liabilities late by more than 60 days of the minimum amount of PLN 500 9 . Although the situation is different in different sectors, relatively 10 the biggest number of such companies could be found in Water supply, sewerage, waste management, and remediation activities, while the fewest originated from Public administration and in Human health. 13.1% 12.6% 7.7% 7.0% 6.7% 5.8% 5.2% 5.2% 4.4% 3.8% 3.8% 3.3% 1.8% 1.8% 1.6% 0.9% 0.3% 0.2% R o m a n i a P o l a n d P o r t u g a l G r e e c e T u r k e y I r e l a n d I t a l y E u r o p e U n i t e d K i n g d o m S p a i n B u l g a r i a B e l g i u m F r a n c e S l o v e n i a C z e c h R e p u b l i c H u n g a r y F i n l a n d T h e N e t h e r l a n d s G e r m a n y D e n m a r   The geographic distribution of companies in Poland whose payments are late by over 60 days is also worth examining. The biggest percentage of such companies can be found in Śląskie Province -6.1% and in Kujawsko -Pomorskie -5.7%, the smallest in provinces in South-Eastern Poland: Podkarpackie -3.4%, Podlaskie -3.6%, and Małopolskie -3.7%. Payment morality of Polish companies is differentiated and depends on their location. Undoubtedly, it is influenced by cultural aspects connected with traditional, conservative values typical of South-Eastern Poland. A similar differentiation can be observed when looking at loan repayment performance of micro-entrepreneurs and individuals, which is confirmed by numerous analyses of the Credit Information Bureau [PL: Biuro Informacji Kredytowej].
Moreover, we need to note that the number of companies whose accounts receivable are late by over 60 days differs depending on the size of an enterprise. According to the survey conducted by Bisnode Dun & Bradstreet, almost every fifth micro-entrepreneur reported payments late by over 60 days while among large companies the problem affected only every twentieth business. Thus, we may conclude that the smaller a company the higher the percentage with accounts late for more than 60 days. Diagram 6. Share of companies from a given province with payments of minimum PLN 500 late by more than 60 days in the total business population in a province at the end of 2016 6  Interestingly enough, besides Romania and Greece only Poland has got such a high percentage of micro-entrepreneurs with payments late by over 60 days.

Consequences of Late Payments
As much as we can identify the reasons for late payments, we can also point to their consequences and costs entailed by them. The consequences are only negative as they are directly linked with the need to bear additional costs of business operations and indirectly with the cost of the lost opportunity. If a company had no expenses related to late payments, the funds could be spent on its growth. Hence, it is necessary to identify the effects of late payments. However, the identification of total costs of late payments, i.e., real expenses and the lost opportunity, is a real challenge as they are not distinguished explicitly in books of accounts. To calculate them, we must carry out a questionnaire study among entrepreneurs.
We may not limit costs of late payments to direct costs connected with maintaining financial liquidity by businesses with a high share of overdue accounts receivable, which is why their revenue from sales does not generate cash inflows. They must finance their current operations with debt capital (loans and borrowings), for which they pay interest rates, which, in turn, reduces profitability of their business and engaged capital. Companies also pay high costs of monitoring late payments from their business partners and costs of their collection. Untimely payments from business partners produce real hurdles to the growth of businesses and, ultimately, may even lead to their closure or bankruptcy. J. Shopowski argues that one out of four bankruptcies in the EU was caused by late payments for goods delivered or services rendered, which led to the loss of almost 450,000 jobs annually 11 . We should not forget alternative costs reflected in reduced investment activity caused by disturbances in financing current operations 12 . That is confirmed by P. Białowolski and A. Łaszek, who, basing on conducted desk studies, clearly indicate that late payments and payment backlogs exert a negative impact upon economic growth and make investing more difficult 13 .
Further negative outcomes of late payments are identified by S. Grzelczak, who claims that untimely payment or non-payment induces business community to think that they should not trust other entrepreneurs, even their long-term business partners. Hence, it is safer and more convenient to request cash prepayments for products or services or to consider moving the business abroad where payment morality is higher. As a result, there is an overall mistrust, positive relationships and economic links decay and they get replaced with suspicion and mistrust, which instigate safeguard clauses and intensive legal assistance. That, in turn, increases the cost of doing business and, in extreme cases, leads to a growing wave of bankruptcies. All these factors impede growth 14 .
As we should not examine the consequences of late payments only at the theoretical level, we need to conduct questionnaire based studies to identify these effects. To this end, we may use an international survey conducted by Intrum Justitia. According to the latest edition of the survey from 2017, the major global consequences of late payments included: limited (reduced) liquidity indicated by 42% of companies, loss of income (lost opportunity cost) (40%), reduced growth potential (33%), additional external costs (29%), threat to the survival of the business (27%), not hiring new staff (25%), and the need to lay off staff (19%). Remarkably, individual consequences of late payments depend on the region of Europe from which a company originates. The biggest consequences of late payments are experienced by companies from Southern Europe, while the smallest in Northern Europe. Surprisingly, liquidity squeeze is the major consequence for companies from the South of Europe (74% of indications) and from Central Europe (45%). For companies from Northern and Eastern Europe loss of income is more important than liquidity squeeze.
Besides identifying the consequences of late payments, we should also examine how they impact businesses. The data in Diagram 12 is rather surprising. For five out of seven consequences a high and medium impact is very close and ranges between 35% and 39%. Łaszek presented the consequences of payment delays as identified by Polish companies. The most frequent consequence of late payments is payment backlog. As many as 27.9% of enterprises mention difficulties in paying their own liabilities due to untimely payments made to them by their customers. The second and much less intensive effect is the need to restrict investment activities. It is experienced by 26.8% companies in the country. Other consequences are less relevant. For the reasons pertaining to late payments 7.5% companies in Poland declare that they had to refrain from placing new products on the market and 7.2% had to reduce employment or wages; 4.5% enterprises were forced to increase prices 15 .
Similar, although slightly different consequences of delays in their accounts receivable are identified by Polish companies in the study conducted on a regular basis by Intrum Justitia. In its latest edition in 2017 Polish companies that experience a high and medium impact of a particular consequence upon their current operations mentioned four main consequences, which they experience at almost equal levels: liquidity squeeze (for 39% companies its impact is medium and high), loss of income (38%), reduced growth potential (38%), and threat to survival (36%). Under the Portfolio of accounts receivable of Polish enterprises study the authors examined costs born by enterprises as a consequence of late payments. Within the framework of the study, costs of late payments to enterprises include: (1) losses resulting from non-payment, (2) costs of interest, (3) costs of debt monitoring and collection, (4) costs of extensive legal procedures designed to reduce the exposure to payment delays, (5) costs of withdrawing from some highly risky markets. The distribution of costs entailed by late payments, as well as their average value by groups of enterprises of a certain size from selected industries, are presented in Table 7. Costs of late payments to the whole economy reach 6.3 of total costs paid by enterprises every year. The total cost entailed by payment delays exceeds PLN 100 bn 16 . Enterprises in construction and telecom industries must be prepared to face high costs exceeding 8%. In the construction industry problems are most probably linked with the specificity of the sector, where birth and death rates of companies are very high and quite a big proportion of revenue is generated in the shadow economy. For telecom companies costs are also due to the dispersed population of their customers, which disturbs monitoring and an efficient collection of receivables. In most cases amounts involved in overdue payments are small, which means their collection is little profitable. The smallest costs of payment delays burden manufacturing companies. They are slightly higher than 4% of total costs. This is surely the effect of their stable portfolios composed of large clients, who are easy targets for monitoring and can be pressed if they are in delay. Medium-sized and large companies much more effectively manage their costs entailed by late payments and they can reduce them to less than 4%. In large companies costs of payment delays are even lower and on average amount to only 3.3%, i.e. by over 70% less than in micro-businesses. It makes the life of enterprises operating at a big scale significantly easier and improves their abilities to cope with market hardships. In general, micro companies pay the highest cost of payment delays of their business partners, which is why they are the most affected by the problem. Even in small companies with 10-49 members of staff, costs of late payments are much lower and they amount to ca. 5.5% of total costs, i.e., by ca. 1/3 less than in micro companies 17 .