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The dizzying debate over payment terms

November 30, 2015

For any supplier, receiving payment is the most fundamental issue. That is why payment terms will always be a contentious issue – and why current trends to extend the payment cycle are arousing such interest.

Earlier this year, IACCM undertook a global survey which confirmed that large corporations are pushing their suppliers to accept longer payment periods, with 90 days now quite common. This mostly impacts smaller businesses – a finding confirmed by a recent YouGov poll in the UK. For small and medium enterprises, it found that roughly 60 days worth of revenue is tied up due to non-standard payment terms.

Most of these suppliers have encountered demands to accept later payment and few have felt able to resist. One consequence of this is the increasing development of supply chain finance – just one example being a recent announcement by AIG and Prime Revenue. In return for ‘early payment’ (i.e. getting paid in accordance with the more traditional payment cycle), the supplier pays a ‘small discount’.  And hey presto, the problem is fixed! In fact, the announcement envisages that this solution will allow customers to continue extending payment terms ad infinitum with the only inconvenience to the supplier presumably being an ever-larger discount.

In many ways , this development smacks of lunacy. At a time when large corporations are mostly awash with cash, with interest rates at a record low, why precisely do they need to drive greater cash retention through delaying supplier payments? After all, the introduction of these supply finance intermediaries simply adds cost and complexity to the process. Ultimately, suppliers are not stupid, so they will be adding the ‘payment discount’ into their pricing. This move seems to achieve nothing except adding costs into the supply chain. (The only counter-argument I have heard being that it creates a war-chest for potential M&A activity).

Perhaps the motivation is less to do with current market conditions, but more an anticipation of the next cycle. It is easier and less controversial to impose extended payment terms while money is cheap, so do it now and reap the profits when interest rates increase. Alternatively, switch back to early payment offerings with a sizeable discount and claim these as ‘negotiated savings’. But whatever route this follows, does it really make sense?

  1. John Jorgensen permalink

    If X and Y wish to improve their respective cashflow, and payment terms are the typical treatment area, and X normally trades on 30 days standard payment terms, and Y is seeking to extend them – but if ‘Bank Z’ can offer a service which means X gets paid in 7 days (not their standard 30, so better) and Y gets paid in 90 days….then so long as there is a sensible treatment of the cost of money between them (thereby avoiding price impacting, or transparently so) what’s criminal about it? I cannot see how it is overly complex? The Bank would or should not allow payment terms ‘ad infinitum’ (he says with rose coloured spectacles).

    I see that mechanism as a different outcome than a customer simply attempting to bully its suppliers into accepting long payment terms, which is myopic and ultimately unsustainable to reputation.

  2. John, my comments are certainly not suggesting that there is anything criminal in this – only questioning the point and purpose. Sure, if customers need to retain cash, I understand this mechanism – but in an era of zero interest rates and when many are already sitting on major reserves, what is the point? And this is not just a question of suppliers receiving money early – they pay a significant sum to be paid on terms that many of us would consider a normal and reasonable period.

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