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U.S. Business Debt Is Growing, But It's Becoming Harder to Pay It Off
[May 15, 2024]

U.S. Business Debt Is Growing, But It's Becoming Harder to Pay It Off


With current market conditions being so unstable and inflation rising nearly every month, more U.S. businesses are struggling with cash flow. According to Creditsafe's new research study, Perils of Rising Debt & DSO, growing long-term debt and missed customer payments can become the straws that broke the camel's back, putting a strain on cash flow and pushing companies closer to bankruptcy.

Our research found that long-term debt has increased for over half (58%) of U.S. businesses in the last 12 months, while 74% of businesses have seen their operating expenses increase. But what's especially worrying is that missed customers payments are more of the norm than the exception, with only 14% of businesses reporting that most (76-100%) of their invoices are paid on time.

Express, the popular mall retailer, is a perfect example of how rising debt can take its toll on the bottom line. According to a court filing, Express had $1.2 billion in total debts as of March 2, 2024.

Plus, Creditsafe data revealed that the number of late payments made by Express increased in the second half of 2023. These factors, combined with its growing debt and declining sales for an extended period, led to Express filing for bankruptcy on April 22, 2024.

Highlights from the report include:

  • Missed customer payments are becoming a bigger problem for American businesses. Our study found that 39% of businesses said their customers paid their invoices 1-30 days past payment terms in the last 12 months. Plus, 46% of businesses said their customes paid their invoices 31-60 days past payment terms and 15% said their customers paid their invoices 61-90 days past payment terms in the last year.
  • Invoicing mistakes, cash flow and product dissatisfaction are leading to more missed customer payments. As our study reveals, 35% of businesses weren't paid on time because their customers had cash flow issues. But for 19% of businesses, their customers paid their invoices late because they weren't satisfied with the quality of goods or services delivered. Meanwhile, 37% of businesses said missing PO numbers and incorrect billing information on invoices were the reasons their customers paid late.
  • With revenue and market conditions being so unpredictable, more businesses are creating bad debt allowances. As our study reveals, 33% of businesses said their cash flow issues have been caused by challenging market conditions. This isn't hard to believe since the annual inflation rate in the U.S. rose for a second consecutive month to 3.5% in March 2024 - increasing from 3.2% in February. As a result, companies are building bad debt reserves into their cash flow. For example, 81% of businesses said they maintain an estimated allowance for doubtful accounts as part of their cash flow management process.
  • Trade credit: a delicate balancing act between risk and reward. According to our study, 26% of businesses said their cash flow issues were caused primarily by having a higher ratio of customers using trade credit to pay for goods and services. This makes a lot of sense given that 64% of businesses extend trade credit to up to 30% of their entire portfolio. Plus, another 25% extend trade credit to between 31% and 50% of their customers.
  • Cash-strapped companies with declining revenue are most likely to pursue debt consolidation and debt restructuring. According to our study, 84% of businesses said they're most likely to pursue debt consolidation to get themselves out of financial trouble. Meanwhile, 84% of businesses would go down the route of debt restructuring.



Steve Carpenter, Country Director for North America at Creditsafe, has seen this happen to companies enough times to know that risk monitoring and management could go a long way toward preserving cash flow. "When I saw our study's findings and noticed that very few companies were being paid on time, it was a reminder of how important it is for companies to do the proper due diligence on their customers before they become customers. One of the best ways to do this is by reviewing your customer's business credit report so you see the total number of outstanding bills for the last 12 months and what portion of these bills are current and what portion are late. Why is this important? Let's say you look at a customer's business credit report and it shows the customer has had a poor track record of paying their bills on time (i.e. only 30% of their bills were paid on time in the last 12 months), that should be taken seriously into consideration when deciding whether it makes sense to sign a customer or not."

ABOUT CREDITSAFE


Creditsafe, the global expert in credit monitoring and risk management, is the world's most used provider of business reports. Today, over 115,000 customers globally depend on Creditsafe to make critical business decisions. Using real-time data from over 9,000 sources across over 200 countries and territories, Creditsafe's mission is to help businesses mitigate financial, legal and compliance risks, while also empowering them to make more informed decisions. To learn more, visit our website.


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