The Curse of Long Payment Terms and Late Payments

Are either, or both, of these scenarios familiar?

It seems to be increasingly the case that companies, especially big ones, are pushing their working capital requirement onto their suppliers by imposing long payment terms on them and then not paying to those terms. Ironically, these same companies are often the ones insisting their suppliers work to improve their ESG credentials.

Long Payment Terms

Payment terms historically used to be 30 days after the date of invoicing but suppliers are increasingly being asked to agree to much longer payment terms as per the real life example above. It is often hard to understand why these companies do this. Surely they are big enough to pay everyone on shorter payment terms.

But look at it from their point of view. In the example of a white goods manufacturer they may be making goods in somewhere like China, shipping them to a warehouse in the UK, distributing them to their client’s distribution centers and then waiting 90 days for their clients to pay them. All the time they are paying out money long before they get paid by their clients.

It is easy to see why companies like this try to pay their suppliers as late as possible. However, they can only do this to the extent that suppliers are able to cope. It is a commercial balancing act between having reliable, good quality suppliers versus ensuring their working capital requirements can be met. If payment terms are too long they will struggle to find reliable suppliers willing/able to work to those terms.

The fact that payment terms are a commercial decision means they are negotiable. It is a commercial decision for both parties to agree to and should be seen in the context of the overall commercial decisions e.g. price, timelines, deliverables etc. It may well be right to agree to a reduced price for shorter payment terms, or a way of defending against lower prices by agreeing to longer payment terms. The point is, it is negotiable.

Quick takeouts:

• Understand your client’s working capital requirements.
• Negotiate, negotiate, negotiate!
• Look for alternatives such as invoice financing.
• If the payment terms don’t work for you, don’t do the work.

Late Payments

There are multiple reasons why payments may not be made in accordance with agreed payment terms. As often as not, especially with big companies, it is a problem of process rather than a lack of willingness (or inability) to pay. On saying that, any delay in payment is to the benefit of the client and detriment to the supplier.

The process issue could be to do with the client’s processes. In order to get approval for a purchase order, there may be multiple layers of approval required. It only takes one person in the approval process to be on annual leave for the process to be delayed. Also, it is often a task that clients are not fond of doing. They may be under time pressure to deliver and therefore put off raising the purchase order until absolutely necessary. They won’t necessarily think of the impact on the supplier.

On the other hand, the issue could be with the supplier’s processes. Starting work without a purchase order is always going to be a risk and it is often difficult to insist on having one before starting. Alternatively, the instructions provided for invoicing are not followed. Maybe the wrong address is used, the invoice is not being sent in the subscribed manner or the invoice doesn’t quote the requested information. These issues can be especially problematic as often a supplier doesn’t find out there’s an issue until they chase for payment.

In order to minimise late payments, it is important that everyone involved understands what is required. If, however, the client is delaying as a way of increasing their working capital it is important to have a clear policy on credit control, how and when to escalate and having a clear and honest discussion with the client. It is also worth ensuring that any contract is very clear about the ownership of any Intellectual Property. This should only ever transfer once payment has been received in full.

Quick takeouts:

• Be sure all invoicing requirements are followed fully at all times.
• Make sure the right bit of paper gets to the right place, at the right time i.e. get in touch with the client’s finance department long before the invoice is due to ensure it is on their system ready to be paid.
• Make sure the client is aware of the impact of any delay in issuing purchase orders.
• Don’t start work without a purchase order.
• Chase, chase, chase!

Final thoughts

As the saying goes “Cash is King.” It is vital in a commercial relationship that everyone understands the implications of the entire agreement, including the flow of money. The real issue is when big companies agree terms and then deliberately pay beyond the time that has been agreed. This is happening all too often and action needs to be taken against such companies. At the very least they should be named and shamed but there is also a role for governments to ensure there is a legal framework in place to discourage companies from taking advantage of smaller suppliers for their own gain.