Skip to content

Payment terms: do large companies abuse their power?

April 21, 2015

51% of contract managers say that payment terms have become a more contentious issue in their negotiations, with many smaller companies under pressure to accept longer payment periods. Overall, 70% of companies say that they have adjusted their standard payment terms during the last 2 years.

In a recent IACCM survey, 18% of major corporations (those with over $40bn annual revenue) acknowledge that they now pay suppliers on 90 day (or more) terms. This compares with just 5% of smaller companies (revenue up to $10bn). Larger corporations are also more likely to impose ‘early payment discounts’.

40% of smaller companies report that more onerous payment terms are being imposed on them by their customers. This compares with just 22% of large corporations facing the same pressure. There is universal agreement that the main factor determining acceptance of these provisions is negotiating power (59%), followed by ‘the nature of the relationship’ (43%). Just 25% say that they vary terms based on geography or market segment – pointing to the trend towards universal consistency.

However, important regional variations remain in place. For example, in the US, the trigger for invoicing often remains ‘shipment’ – a concept rarely used elsewhere. In the Middle East, Africa and Asia, there is a greater tendency to invoice on acceptance and for the payment period to commence on receipt of invoice – but these more generous terms are accompanied by 30 days remaining the norm for the payment period.

Smaller companies also experience greater difficulty in getting paid. 77% say that customers typically adhere to the payment terms, whereas this rises to 92% for large corporations.

The survey also revealed that European companies are the most likely to use outsourced payment centers, with 20% making use of such services, versus 15% in the United States and just 9% in Asia.

The reasons for extensive negotiation immediately become apparent when comparing the standard positions of buyers versus sellers. For example, 67% of suppliers still attempt to operate on 30 day terms. Just 16% of suppliers include early payment discount in their contracts, whereas 40% of customers seek such discounts. When it comes to charges for late payment, the position is of course reversed – with 60% of suppliers seeking such terms and 29% of buyers accepting them.

Many of those surveyed do not expect any reduction in the pressure on payment term negotiations. They anticipate that businesses will continue to see extended payment as a mechanism to enhance cash flow; they also anticipate increased levels of factoring / supply chain finance; more discounts for early payment; and continuing standardization across business units.

The IACCM survey was conducted in March/April 2015 and gathered input from almost 600 corporations. Full results will be issued by the end of April.


Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: