Do you believe the Media Hype around Payment Term Extension?

There is no shortage of media hype around payment terms and big companies squeezing their suppliers.

 

Credit terms, which in the past were historically used to ensure you got what you paid for, are now viewed more than ever as an opportunity to inject liquidity by some outside third party, or that is at least the perspective from some in the corporate world. I had one Packaging company’s director of a shared services center sum it up. “Banks created supply chain finance as they watched dollars passing back and forth between trading partners and wanted a piece. They convinced big customers to push terms. They went to Coke and Pepsi and said push out everyone to 120 days and I can get into this money.”

I recently had discussions with treasurers and CFOs of companies in the $50 million to $500 million range. While payment terms are not standard across industries, the vast majority of interviewees did not see their OEM or large buyers pushing them out aggressively, contradicting media reports. I had one banker confirm this with their own bank data, which found payment terms for the middle market in the 30 to 35 day range. This is based on their actual spend data coming out of ERPs that the bank receives on invoice level for each of their customers.

There are very prominent examples in the media of OEM buyers pushing terms, such as Boeing or the Association for Packaging and Processing Technologies who called out General Mills for pushing vendors to 60 days. Even the New York Times called out food and packaged goods companies in a recent article .

But the data used in working capital surveys is sourced from publicly available accounting information. There are several working capital surveys published every year by large consulting organizations trying to shock you that several hundred billion dollars could be recovered in cash if all quoted companies were in the upper quartile of performance of all of their various studies.  Middle market companies, which are typically privately held corporations, are excluded, so the surveys are by no means a complete picture of what is really going on.

This is not to say middle market companies are not getting “asked” by their large customers to extend terms. From my discussions, the biggest issue raised by term extension was its impact on working capital. By doubling the terms, you double your account receivable exposure and customer credit limit. This could impact liquidity needs, especially if the receivables outstanding are a significant portion of total sales. When OEMs and large buyers do approach with term extension, the approach is to comprise, push to the following year, and potentially look to raise prices to adjust for extra days. It’s all about who has the leverage.

Here are some questions to ask if you are a large company and considering payment term strategy:

  • What are the parameters on which companies can negotiate payment terms effectively with their suppliers?
  • What are the major risk associated with supplier payment term extension and how companies can mitigate or prepare for those risks?
  • What are the best practices adopted by large companies in terms of maintaining good relationship with SME’s.(considering payment terms, working capital, cash flow, etc.)?

So who to believe? Purchase to Pay networks are skewed by the large buying organizations in their database. Banks (and companies like Amazon and Google) are best positioned to access this data – Why B2B Credit Bureaus Should Fear Amazon

No doubt the “opportunities” of term extension presented by consulting and accounting firms and Peer group comparisons will continue to put added pressure on companies selling to large corporations, but for many middle market companies, it’s a few customer problem (albeit for significant receivables) and not widespread across their customer universe.

I recently completed detailed interviews with both CFOs/Treasurers/Credit Directors at middle market companies about their attitudes and use of early pay finance. If you are interested in learning more, contact me at dgustin(at)globalbanking.com

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First Voice

  1. Robert Kramer:

    David, I gather you’re trying to stir the pot a bit here. Many surveys over the past few years show most suppliers are feeling pressure to extend payment terms, including those conducted by organizations that are not part of the vast bank-consulting firm conspiracy such as IACCM and the Credit Research Council. The adjusted DPO data for public G2000 companies is consistent with the survey data. The impact varies by industry, but overall it’s not hype, big companies are increasing payment terms in the US and Europe.

    We are seeing something different over the last several years though. Why? Why now? It’s not because commercial banks created demand by convincing big companies to push terms. Yes, Supply Chain Finance is a great way for banks to insert themselves into intercompany financial flows, but if commercial banks had that much influence, most international trade would still be conducted using LCs. I believe the answer includes several factors, including technology, current market dynamics and the underlying determinants of trade credit (which most studies indicate has historically been based on economic, industry and informational factors rather than the provision of a warranty period).

    Technology and macroeconomic trends have impacted many business processes, including supply chain flows. There’s no reason to think they shouldn’t impact financial flows.

    Robert Kramer
    Managing Partner
    Capgenta, LLC

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