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The Problem With Extended Payment Terms

Running a small business is bloody hard. That may be the understatement of the year, we know. But, as if there wasn’t enough to deal already, we’re now seeing a big problem facing a lot of businesses not only here at home in Australia, but also overseas.

And it revolves around extending payment terms.

Extending payment terms

Basically, extending payment terms means that a business has decided, in their infinite wisdom, to add weeks or months to their time they can take to pay their suppliers.

Because of the tight financial times that we live in, you can understand why big businesses do it – without going into the nitty-gritty, for them it’s all about managing their cash flow more effectively, freeing up a lot of cash in the process. Rather than rushing to pay their suppliers back within 30 or 60 days, these businesses, in some cases, are now taking over 180 days (six months!) to pay their suppliers.

It can be looked at as a no interest loan, in a way, with business simply now able to add more time to their payment requirements without any recourse or damaging effect.

The knock-on effect

But, doing so has a serious knock-on effect for the little guy.

Because they’ve extended the amount of time that they actually need to pay, their supplier is left waiting. As we know from previous blogs, doing so stifles cash flow, one of the main reasons that businesses have to close their doors in this current day and age.

It’s a move taken straight from the Donald Trump playbook of dealing with your suppliers.

Because of this, small businesses will have to take certain counter measures including cutting discretionary areas of their business that they might have otherwise been able to offer to their customers. And they may be forced to postpone certain business plans like expansion or hiring.

A disturbing trend

Ethically and morally, it’s pretty cut and dry; it’s not ideal.

The big end of town has been dictating terms and conditions to the little guys for quite some time. It’s a tactic that can be traced back to just before the Global Financial Crisis, where credit was scarce and businesses were looking for any way imaginable to keep their heads above water.

It’s something that’s also been seen in a number of high profile cases, particularly with fast-moving consumer goods company, Procter & Gamble, and brewing behemoth, Anheuser-Busch InBev. In P&G’s case, by extending their payment terms, they’ve been able to add $1 Billion to their cash flow thus far.

The problem though is not just these companies’ behaviour. Rather, this is reflective of a bigger problem: the shrinking of profit margins, the demanding nature of businesses and their failure to recognise the welfare of their suppliers and other stakeholders outside of their four walls.

What’s being done about it?

Thankfully, there is increasing interest from regulators and governments to protect small firms from unfair contract terms.

Diageo – a global beverage company with dozens of brands under its umbrella – backed down on extending their payment terms. Initially they wanted to extend it to 90 days, but bowed to to pressure from certain governments and other suppliers and took it back down to 60.

A small win.

How to protect yourself

There are a number of things that you can do to protect yourself in this situation:

  • Build good relationships and strong communication with your customers. It is better that you know that they are experiencing cash flow problems so that you can deal with the problem together. Your customers’ difficulties could stem from late payment problems with their own customers and all that they need is a little more time to sort the problem out.
  • Having said that, be firm but fair. You are in business too and need payment. If you have trouble contacting your customer, then you can always use the Late Payer List to open the lines of communication and either get paid or at the very least enter into some from of payment plan.
  • Also, set clear terms. Ensure that you have this in place so that there’s no grey area around what you expect from your customers.
  • Before supplying a new customer with goods or services, check to see that they have a good track record with their payment. The Late Payer List provides access to a nationwide database of Late Payers that generally aren’t recorded on the traditional databases because of the size of the debts. 

Power to the little guys

The collective bargaining power of small business is huge, however, the individualistic nature of small business creates a fragmented organisational structure that works against us. Only be getting organised can we change this existing paradigm. That’s where Late Payer List plays its part.

If we collectively say no to longer payment times, then the big end of town will have no choice but to agree to shorter terms.

If they aren’t happy with that they can always try and do the work themselves…