Extended payment terms: who really pays the price?

In tough economic times, businesses large and small look for ways to manage their cash flow more effectively. When money is tight it’s common for firms to seek to widen the gap between creditor and debtor days, and demand extended payment terms (trade credit) from their suppliers.

But now, it seems, trade credit is increasingly being used as a deliberate tactic by big firms to delay making cash payments. Extended and, arguably, unfair terms, seem to have become the new norm.

IACCM’s survey report Do Large Companies Abuse their Power? confirms that payment terms are a significant area of growing contention – driven, it seems, by the policies of a minority of large corporations – and leading not only to longer payment periods, but more difficulty in getting paid.

Firms operating on small margins and with limited power to raise prices become increasingly fragile when faced with extended payment terms. Trade credit may make it more likely that a financial shock will propagate through a sector dependent on trade credit.

If small firms aren’t getting paid on time, they’re not making a lot of investments in research and development or hiring. If a firm has extended trade credit to finance its customer’s capex, it’s rational to expect those funds are not now available to invest in its own business.

Small firms forced to extend trade credit will cut other discretionary areas of their business that might otherwise benefit their customers, e.g. innovation, capital investment and training. And they may be forced to postpone hiring and expansion because of the longer wait for payment.

While, from a large firm’s perspective, extending payment terms appears to be a simple and efficient method to manage cash flow and reduce financing costs, it does indeed have many hidden consequences – and some that are all-too apparent.

Read the full article in the IACCM Contracting Excellence Journal.

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