EOW Reflections: Fair payment terms

Sometimes a new year feels less like renewal than coming back to the start of the cycle. For me that means it’s January so it must be time to remind bigger firms that extending their payment terms to their smaller suppliers isn’t a great idea.

We had a distraught message this morning from a small supplier saying that their customer of many years, is changing payment terms from 30 days end of month to 60 days end of month. The letter didn’t expressly say ‘take it or leave it’, but often that’s the reality facing suppliers. If you can’t afford to lose that customer, aren’t sure you can replace them with a better paying one, and don’t have the time and capacity to go out looking for new ones, what option do you have but to accept worse terms. That’s no choice at all. What the customer frames as ‘necessary’ business practice can feel very much like bullying to the smaller supplier.

We see this frequently. As the cost of doing business has increased more firms have extended payment terms. And they have done it in language that hardly invites negotiation.

There’s no one who can intervene in these situations. This is a contractual issue and as such it’s between the customer and supplier. If you accept the new terms you can’t go back and complain later, so if you are going to try to negotiate do it before signing or verbally agreeing to anything.

30 days end of month could be 90 days. That’s a long time to wait for payment. Does your customer usually pay on time or are invoices often paid after the due date? How will you finance the business for those 90 days, in particular for that additional 30 days where in the past you would have had your money? Can you pay your suppliers and bills from reserves or will you have to borrow to tide you over and buy new materials, and if you will have to borrow how and from whom? Who will lend you the money? You may need to consider sources of cash you’ve not used before like invoice financing. No matter how well you manage your cashflow over the change period there will be uncertainty and you will probably put a hold on any plans to invest in training and equipment, take on new people, grow.

To the bigger customers I say: is that really what you want? Do you want your suppliers having to put on hold plans that are likely to benefit you as the customer by improving the products or services you depend on? Do you want the supplier to increase prices because they’ve had to borrow to tide them over the payment gap and they need to pass the costs on to you, leaving you to absorb them or pass them on to your own customers? You extend payment terms at your peril and you are in effect using the supplier to bankroll your own business.

Good suppliers with options could leave you for better paying customers, possibly even your competitors, giving them the advantage. You could find yourself with a reputation for being a poor payer leading to suppliers refusing to work with you. Investors could say to themselves we think this is a sign of financial troubles (Good Business Pays has found that extending payment terms has been a sign of financial difficulties). Ethical investors want to invest in well run firms that treat suppliers well and that includes paying fair, and good potential employees want to work for firms that do the right thing.

There’s also the Prompt Payment Code. If you are a signatory and you extend your payment terms, that could mean you breach the Code in future. If you’re in breach you can be removed from the Code. That may not seem like much of a threat now but increasingly suppliers check whether firms are signatories before agreeing to supply them. We all work better when we work together and if you pay quick and fair #EveryoneBenefits.