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To the company’s credit

13 February 2015

News Analysis: To the company’s credit - Read more

Payment terms have been causing a furore for the past few weeks with regard to ethical treatment of suppliers, supporting SMEs and obtaining finance

In light of recent allegations that Heinz and Capita have been mistreating their small British suppliers by making them wait inordinately long periods of time for payments, Governance + Compliance spoke to two industry sources to get further insight into supplier payment terms and their view on what can be done to ensure these are fair for all parties involved.

Tradeshift CEO Christian Lanng explains why businesses of all sizes must start thinking about the greater good to ensure that there is trust in the supply chain.

'Winning a major deal with a large organisation can be a landmark moment for a small business. Securing that first big contract is often what catapults an idea into a living breathing start-up. Yet, that big contract can also throw up a litany of problems. Too often the SME has to bend over backwards and adhere to the strict payment and procurement terms. This, unsurprisingly, can impact profitability, morale and the ability or desire to take on additional larger clients.

However, the major issue for SMEs is getting paid for the services or goods that have been delivered. Cashflow is the biggest financial challenge faced by a small business; they depend on a steady supply of capital to cover payroll, expenses and material costs. So when enterprises turn the screw by insisting on lengthy payment terms, it can damage solvency to an extent that can shut a business down for good.

This is a widely reported issue, yet 2015 has not got off to a great start on this front. Heinz, the iconic US food manufacturer, has upped the length of time it is making suppliers wait for bills to be settled, from 45 to 97 days. In the same week, multinational brewer AB InBev – the company behind Budweiser, Stella Artois and Boddingtons – was revealed to be demanding payment terms of 120 days from the end of the month in which an invoice was issued.

Paying late or, as Selfridges did last year, demanding discounts simply to settle invoices, can really bite. In some cases, it leads to capital constraints which cripple the supplier, even those with otherwise healthy businesses. With cashflow remaining the biggest financial challenge SMEs face, it is incredibly frustrating to hear of global enterprises like Heinz and AB InBev sweating their suppliers.

Suppliers want to be paid early and buyers want to delay it – that has been the case since the dawn of time. However, supply chains work because they are based on relationships that deliver value to all parties involved. Moves like this stand to erode the trust and value of being part of the chain.

With an array of technology solutions on offer to avoid late payment issues, there is simply no need for enterprises to adopt such harsh tactics. These digital platforms can level the playing field between both sides of the supply chain, enabling businesses to collaborate online more easily. One core element is dynamic discounting, which ensures that both sides get a deal they are happy with by adjusting payment terms to arrive at a deal that works for both parties.

For SMEs that find their business compromised by strict payment terms, network-based contracts can allow for an invoicing process which suits them. This will help eradicate accusations of bully tactics levelled at companies such as Heinz and Capita and help secure small business solvency. The message to these organisations is that everyone benefits by helping to create a circular economy driven by collaboration.

This will enable small businesses to thrive, giving companies a greater choice of supplier options, offering better quality and value. Looking at the bigger picture, small business growth creates jobs throughout society, benefitting the economy as a whole.'

David Banfield, President of The Interface Financial Group offers some options on dealing with big business and how to manage extended terms of credit.

'Cashflow is a word that many business owners dread. From day one, it is drummed into you that the difference between businesses that succeed and those that fail is how they manage their company’s cashflow.

When big clients extend their terms of credit and the banks are not willing to finance your business, it is difficult to see where you are going to get the money from to keep your business afloat.

If you are stuck in this predicament, there are some simple measures outlined below which can help bolster your cashflow, whether it is to pay salaries or expand your organisation’s operations.

1. Be reasonable but not a pushover

If extending the terms of your accounts receivable by 10 or 15 days helps secure a new large client, then it makes sense to accommodate. However, when large corporations start forcing their terms on you and pushing for 90 days’ credit, you may want to consider your options. If you are dealing with businesses in Europe, you have some protection. The EU’s Late Payment Directive was implemented in 2011 to strengthen business’ rights to prompt payment. In a nutshell:

  • Harmonisation of period for payment by public authorities to businesses: Public authorities have to pay for the goods and services that they procure within 30 days or, in very exceptional circumstances, within 60 days.
  • Contractual freedom in businesses’ commercial transactions: Enterprises must pay their invoices within 60 days, unless they expressly agree otherwise, and it is not grossly unfair.
  • Businesses are automatically entitled to claim interest for late payment, and are also able to obtain a minimum fixed amount of €40 as compensation for recovery costs. They can claim compensation for all remaining reasonable recovery costs.
  • The statutory interest rate for late payment in the member states should be increased to at least 8% above the European Central Bank’s reference.

More recently, the UK’s Department for Business Innovation & Skills took things a step further when it launched the Prompt Payment Code, which encourages businesses to pay promptly, give clear guidance to suppliers, and promote best practice.

2. Know your place

By this I do not mean that you should bow to the pressures of your customers. On the contrary, know where the product or service you provide fits into your client’s business, and if you are part of their direct or indirect spend. If you play an integral role in their business operations, then you are in a much better position to negotiate. Equally, if you provide more of a commodity service or product, then you will need to consider what strengths you have that you can leverage. Consider whether your products or services are cheaper, if your service is bespoke, or if you can offer early payment discounts.

3. Alternative finance

If your client is unwilling to budge and the bank will not extend that overdraft, all is not lost. There are numerous alternative financing options at your disposal that can help shore up the gap in your cash flow, from peer-to-peer lending to factoring. One form of alternative financing is invoice discounting, which involves selling some of your accounts receivable (invoices that are due to you and are current but unpaid) at a discounted rate to an invoice discounting service. You have the option to sell one invoice, or a batch, on a ‘use-it-as-you-need-it’ basis. In recent years, there has been a significant rise in the number of businesses opting for these services as the banks have declined the requests of businesses, despite needing the funds to support their growth.

As the Government strives to support the UK’s SMEs and the economy continues to recover, cashflow issues will hopefully become less challenging.

In the meantime, the most important thing to remember is that you have rights, you can negotiate, and you have a range of financing options beyond the bank that will be happy to provide funding for your business.'

Christian Lanng is CEO at Tradeshift and David Banfield is President of the Interface Financial Group

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