Extending Payment Terms: Don’t Be So Fast To Judge Jason Busch - February 11, 2015 6:12 AM | Categories: Analysis, Purchasing Process, Supplier Management | Tags: L1, Process and Best Practice Ellen Leith recently penned a guest blog post on Procurement Leaders titled Stop Paying Suppliers Late And Offer Them Choice. The crux of her analysis (and argument) is that extending payment terms and paying suppliers late must be balanced with offering various financing arrangements on reasonable terms. She sites examples of Diageo and others in making her foundational argument. Free Research Report: A Supply Chain Finance Game Changer Consider: “In the case of Tesco, Premier Foods and AB InBev, the demands of the buyer have pushed some of their smaller suppliers to the brink – with some saying that they can no longer afford to do business with them. Of course any transaction is essentially a form of compromise, but for any relationship to work, it has to at least seem fair. So when Diageo sent a letter to suppliers saying that as from 1st February all new contracts will have 90 days terms attached to them, unsurprisingly some suppliers branded that decidedly unfair." It’s a reasonable argument on the surface. But we must not look at terms simply on an absolute basis – it is the behaviors around them that are a much more important measure. Indeed, to truly judge the relative merits of a payment term extension, we must also consider: Whether the buying organization will pay on time – per the specified terms (this remains a huge issue for many companies and their suppliers). As an example, 60 days may not be bad (relatively speaking) if a vendor on 45-day terms receives payment on the 75th day The availability of alternative payment options for faster payment for smaller transactions (e.g., p-card) The comparative cost of capital for buyers and suppliers – and how this can create a nice arbitrage without obnoxious APRs on an early pay basis through supply chain finance and invoice discounting programs The consistency and availability of funds for early payment programs – i.e., if suppliers want to get paid early, will funds be available when they need it? How the right set of approaches, technologies and frameworks can best enable optimal early pay outcomes (e.g., when to use a Prime Revenue a Taulia/Tungsten vs. a C2FO). Portfolio approaches are coming to this market as one-size-fits-all approaches and basic segmentations (e.g., buyer-led vs. supplier-led) do not always do justice to the possibilities As a final aside, I personally wonder why the loan sharks of the B2B financing world (i.e., factors) are not named and shamed like the corporates. To understand all the options for trade financing and early payment, we encourage you to read Trade Financing Matters and our expert subscription coverage of the topic on Spend Matters PRO. Related ArticlesHiperos -- Growing and Broadening the Business Through a Partnership with GTDCThe Continued Fibrillation of the Supplier Management MarketSupplier Diversity From a Diverse Perspective Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of follow-up comments by email. Notify me of new posts by email.