This is a post I never thought I'd have to write. But having recently seen a handful of credit lines yanked from completely credit worthy businesses and individuals, I thought it prudent to author a short post on the topic offering up some nuggets of practical advice. First and most important, it's critical to realize that many of your smaller (and even mid-size) suppliers use their lines of credit to finance operations in times of revenue troughs, capital investments or otherwise rocky cash flow (as a result of the Net 60+ terms that many of us are indirectly imposing on them). When their credit lines are yanked away, they've got to cut costs, fast. It puts them into a turnaround-like situation even though the businesses could, in fact, be functioning quite well. In these scenarios, owners and executives cut headcount where they can get away with it, not to mention Q/A, secondary shifts, etc. It also might cause them to defer spending on maintenance and run on as little inventory as possible (which can lead to shutdowns if a forecasting plan is wrong).
In other words, it's likely that at least a material portion of your supply base will be living hand to mouth in the advent that their credit facility is taken away. And given the overall climate in banking these days, I'd wager we're going to see more of this in the coming weeks. So what can you do? First, if they're an important supplier to your business, it's important to proactively approach them to check on their condition. Waiting for a D&B credit or risk report to come out a month after the fact in a short-term short-squeeze pinch like this ain't gonna cut it. Check on their condition and ask the hard questions about margin, working capital requirements, available cash on the books, receivables, etc. If there is anything amiss, it is absolutely essential to step in and let them know that you'll be a lender of last resort on the payables front. But that you're not going to be looking at them as a charity case.
What do I mean by this? If you have an EIPP system in place with dynamic discounting capabilities already, you've probably caught my drift. In other words, if you can profit from providing flexible early payment discounts (e.g., net 5, net 10) you won't only make a few basis points on the transaction -- you might also be keeping your suppliers in business. Other means of financing might include placing a commitment to new orders that is spelled out contractually rather than just a blanket PO. This might allow them to work with their lenders who might be more willing to part with their precious dollars if they know that large customers are investing for the long-haul with them.
In rough times, we remember those who worked with us. It's sometimes hard to quantify what it means to be a good customer during times like this. But from a relationship stand point, there's no doubt that your suppliers will go above and beyond the call of duty for you (e.g., not put you on allocation when raw material supplies get tight) if you step in for them now. And who knows -- you might very well save your organization a ton in the process by avoiding supply disruptions or unforeseen quality issues that would otherwise result from your supplier's financial challenges. The key is being proactive. Suppliers -- at least the right ones -- should be proud. It's up to you to go first and inquire about the situation they're facing because chances are, they're not going to approach you until it's too late.
- Jason Busch