When Your Big Customers Squeeze You for Longer Payment Terms

A small bottle-cap manufacturer that provides to Coke suddenly finds out that Coke will only pay them after 120 days. Ouch.

Now they can't afford to pay their metal supplier that only offers Net30. The small bottle-cap manufacturer can’t necessarily turn around to their metal supplier and say, “Coke’s not paying me for 120 days, can you give me some more time to pay for the metal?”

Don’t get me wrong. What the big companies like Coke, Kellogg, and Procter & Gamble are doing, asking their own suppliers for more time to pay, is smart supply-chain management. So what’s the problem?

A recent New York Times piece, Big Companies Pay Later, Squeezing their Suppliers, hits the problem on its head:

...a growing number of the world’s largest food and packaged goods companies are asking their suppliers to give them as much as four months to pay their bills — even though they typically require payment from their own customers in 30 days.

These small suppliers also buy goods or services from suppliers who want to get paid on time, not to mention their other bills and employee payments. But unlike companies as big as Coke, small suppliers, like this bottle-cap manufacturer, don’t have the economies of scale or the negotiation power to get four months of payment flexibility.

Eventually, the whole negotiation process trickles down from supplier to supplier, into an entirely complicated power struggle. And who gets the most time on their books in the end? You guessed it, the big suppliers.

How to keep your juice flowing

While this trend may not be fair to small suppliers, you need to come up with your own solutions to keep up your juice, so these customers don't squeeze out all your cash flow. The NYT piece touched upon three trends, and I’d like to share my take on their pros and cons - from the small supplier’s perspective.

Here are three very different solutions to avoid getting squeezed by your big customers:

1. Join up with other small businesses or regulators

These small suppliers compensate for their lack of negotiating power by joining together. They argue that since small businesses still fuel the economy, big companies can’t live without them. If they can create and sign agreements to present to regulators against the big companies demanding longer payment terms, maybe they’ll succeed at limiting the scope of the trend, or the length of the payment terms.

Tips: The industries in which this trend is picking up tend to be pretty competitive, and involve goods that the big suppliers can do without or substitute, like marketing and advertising services. Also, the small suppliers still aren’t fully taking the issue into their own hands, since they’re relying on the regulators to back them up.

2. Negotiate something in exchange for the longer payment terms

This approach says - OK, the big companies aren’t being fair, but let’s at least try to get them to recognize that and give you, the small suppliers, back something in exchange. For example, the big companies can demand longer payment cycles, but offer cash upon payment. Or, the big companies will offer to pay more (almost like getting interest) if they get longer payment terms.

Tips: Still, the core issue remains - who’s responsible for the cash flow? Whatever the arrangement, small suppliers are shouldering the responsibility to act as their big customers’ banks. In the words of Professor Narayanan of Harvard, “They essentially are going to their suppliers for credit, rather than their banks — and for big, creditworthy companies like these, that’s ridiculous.”

3. Find your own source of alternative financing

This solution basically says: instead of trying to fix this larger trend all at once, take the power back into your own hands. Do the same thing that your big customers are doing - give yourself more time to pay for your own expenses.

Don't your customers' payment terms control your business's books, or when you pay your suppliers. You can either ask your suppliers for vendor terms directly, or use purchase financing to give yourself more time to pay.

If your big customers now demand 90 days, go get yourself your own financing for 90 days, so you don’t need to risk paying your own suppliers late. And you also don’t risk damaging your relationship with your potentially strongest buyer. In short, you’re separating between your relationships with your suppliers and customers, and your own cash flow management.

Tips: By taking out your own financing, you may still pay more interest than the big companies that you’re supplying to. Why should you need to take out alternative financing, so that your big buyers can pay you later? If you’re looking into this route, make sure that you borrow at affordable and transparent rates.

Is it fair?

When you’re thinking about these three very different solutions, remember that this is a financial business decision, not an emotional one.

You may be right, and the balance of power may not be fair. But what matters now is that you can control your cash flow in a way that will bring in the most revenue, and grow your business. And as your business grows, you’ll remember to try to look out for your own customers, by respecting their cash flow struggles in turn.