I have noticed a trend for large multinational corporations to require 60 terms. Recently we received a letter from a large customer informing their vendor base that their research has indicated 60 day terms are now industry standard and they will be adopting the practice.
With the recession, this is an understandable cash flow solution. However, I am afraid it will be difficult to turn around after the recession. As a small manufacturing company, we have very little leverage to negotiate.
I would appreciate any feedback regarding whether other companies are encountering this trend toward 60 day terms and if they have been successful in countering it.
60 Day Terms
Answers
I am lucky to work in a time sensitive, non-manufacturing, industry where the speed of receiving results from us has a direct impact on hiring decisions. That said, we have run into occaisions where our clients try to grow their own payment terms.
We are willing to extend the terms as long as what they pay covers their 'interest free' loan. We have produced service agreement amendments where we specifically reflect an increase of 5-10% for all services for any payment terms in excess of Net 30. The result for us has been the client accepts Net 30, and the finance charges associated with making a late payment when they can't get their funds in on time.
I understand that manufacturing is a different animal than the service industry. That said, I think most professionals understand the impact growing DSO has when working with your bank for lines of credit or other financing. Speaking frankly with a peer at the vendor's office usually yields the best results.
If they like your products enough to contract with you, they should be able to partner with you and help you find a solution to cash flow when terms extend beyond the bank's (or your own) acceptable level.
2
I was in a small construction company and our customers ranged from large construction firms to large corporations to various government entities. The trend towards 60 day terms has been growing over the past several years - long before this latest recession. We had certain large corporations dictate 75 and 90 day terms to us as long as 10 years ago. Our ability to negotiate varied inversely with how many of our competitors could perform that specific work, and how badly we wanted it! Even when we couldn't reduce the term, we were occasionally able to get deposits or payments on 'stored materials'. Another possibility is having the money transferred electronically – thereby removing the extra days in transit.
Are any of the materials you are using in manufacture unusually specific? If so, you can make the case that your vendor has specific terms, and you need your customer to facilitate your ability to obtain the materials.
We also found giving discounts for early payments was much more effective than service charges for late payment. Companies will borrow on their line of credit to get worthy discounts. However, you need to stand firm on not allowing the discounts if the payment is received late.
In summation, if you can't get the terms you want, try for pieces that will make the situation more palatable. Good luck.
Proformative offers 400+ business courses with free CPE, many on Finance and Credit.
Leverage is entirely what this is about. The companies that have services their clients can't do without, or who do a lot of business with those clients, will be able to push back. If not, not. As Carline notes above, this is not really new, but some companies are becoming more aggressive given the economy. We are seeing this from a number of very large companies - not the smaller ones. Typically they hold the leverage. However, if you have a good relationship with someone there I would at least put in a call and state your case. But be careful about claiming poverty too loudly b/c you might end up making them feel like you are actually a risk to their
At my last company we went through an excercise reviewing terms across the board to see if there were opportunities for Working Capital improvements. One that came out that was not obvious in the beginning, is that some of the customers demanding extended terms were also major suppliers (a very common occurrence in the chemical industry) so we quickly agreed on the condition that we gat the same terms on our end. GE was probably thte biggest bully in this approach but since we bought multiples in dollar terms compared to what we sold them it was a multimillion $ win for us. There were others flexing their muscle as well and we were able to do the same with them, just not to the same order of magnitude. Think of it - Payables your forgotten friend!
In a product/inventory based environment, there is generally the offset of AR and AP terms. In a service business where payroll is the dominant cost, there is really no such offset. If a client has a Purchasing policy that is not going to change much from 60 or 90 days terms, try compromising by getting a deposit/project mobilization fee within x days of signature/ contract start; I have proposed this before as away to help the client stay within Purchasing "rules" yet provide usme with a cash flow cycle that more matches funding for payroll expenses.
We encountered some of this recently, but fortunately it is not widespread yet despite the fact that most of our customers are substantially larger than we are and thus have the leverage that comes with size. Where we run into it, we call this for what it is--an additional cost to us to provide our software, content or services--and make it clear to the customer that we need to factor that into the overall economics. Too often this issue comes up late in the negotiations as an "oh, by the way" ask from the customer, but we generally have been successful in having this term be on the list of gives and takes so that we get an overall mix of terms that we can live with.
We never expect to get back to 30 days once at 60. I agree with you that this won't happen.
Our company mostly sells to large big-box retailers such as Office Depot and WalMart and I have definitely seen a trend toward longer terms. WalMart recently announced that they were going to move to 90-Day terms for some product categories, though they did help mitigate the impact by arranging a factoring program where vendors could get paid in 30 days at an attractive discount rate since WalMart was guaranteeing the payment to the factoring bank. What comes around definitely goes around as I find that I'm getting slower payments from my customers and then have no choice but to make slower payments to my vendors. I think this is a result of the tight credit markets as much as anything. We are a very seasonal business where half our sales come between September 1 and December 1. In past years we would have asked for an increase in the RLOC from our bank to carry us through the lean months so we can pay our bills on time, but this year they haven't been receptive to the idea.
2
I've heard the frustrations on the same front. Factoring is a good alternative depending on the terms. I wouldn't recommend anyone other than a bank factor, although there aren't many offering it (my bank does). But then there's an option I learned of only 3 days ago regarding the RLOC you mentioned. It's an RLOC that works like a factor but the difference is you don't sell the invoice. You just collateralize it. You're not locked into terms or crazy fees, etc. You just pay the interest rate on what you use. So then it leaves the question for those that currently factor, "Why would I continue to factor if there's a RLOC that doesn't require me to sell my invoices?"
This reply to Copelon comes from someone who has been providing factoring services to small businesses for over 20 years. The difference between a revolving line and receivables factoring has to do with the ability to qualify. We often graduate our clients to institutional revolvers once they grow enough to secure the line that will actually help them. You can check our blog to read up on why a factoring fee (service charge for financing an invoice) is not an interest rate typically associated with borrowing working capital.
But to answer your question, once a bank settles on the credit availability for a revolving line of credit, that limits access to capital. Invoice factoring on the other hand grows the credit availability while the client grows, without a ceiling. This is especially helpful when an emerging growth company is experiencing a steep growth curve and is outpacing it's historical balance sheet.
A client of mine landed a large client (entertainment co. in Burbank) recently and was given terms of 75 days! I was shocked, actually. Seems like bullying. My client runs a small service biz and this is a cash flow killer for him. It will directly cost him as will have to use a line of credit to cover payroll while he carries the AR. I'm going to recommend passing on the financing cost, though I doubt client will accept it.
3
Thank you for all of the excellent comments! I have recently had luck offering a discount for early payment with a customer requiring 60 day terms. I have not yet tried requiring a service charge, but I am keeping it in my negotiation bag.
I agree with Mark in that large clients don't consider the little guys. They want to improve their own cash flow, fine, but why make things difficult for your smaller vendors?
I saw one approach work that I'll tell you about, but I don't recommend it. Our company at the time was having trouble with an insurance company's late payments. My supervisor put together a 30 page packet of information she faxed to the insurance company every day until she got them to respond. An insurance rep called her after the 3rd day and asked "what do you want from us?" even though the answer was obvious. The rep must have understood the message as the payments came in quicker after that.
You're probably right. But it's not unreasonable for them to accept the cost being passed on, seeing as how it'll be 2.5 months before the vendor gets paid. The quicker the vendor gets paid, the less likelihood the client has to absorb any financing costs. It should be as simple as that.
These Net 60 days (and more) payment terms have been around for many years, usually dictated by larger regional and national distributors and bigger organizations in general. It is their way of improving their cash flow without additional borrowings while achieving a significant reduction in interest expense. This practice may be more prevalent during economic recessions but is unlikely to change during recovery. It is a matter of whether or not you can negotiate with your customers more favorable terms for your company. The same goes for working with your vendors and whether you can negotiate better payment terms with them, improving your own cash flow.
The important thing is always knowing what your cash needs are going to be and basing it on these customer and vendor payment terms, along with projected sales, purchases and expenses. If your annual budget is fully automated you may be able to (depending on the software you use) actually forecast your cash using specific payment terms assigned to customers (or customer types via forecasted sales) and vendors (or vendor types via forecasted expenses), which using forecasted sales and expenses and driven by the various payment terms will accurately calculate and display the cash balance at the end of each budget period, as well as produce a complete and accurate forecasted Balance Sheet and Statement of Cash Flows.
It is nice to be able to negotiate payment terms with both customers and vendors in order to maximize your cash flow but it is equally as important to be able to forecast your cash flow knowing and using your existing customer and vendor payment terms.
The actions being taken by the large corporations is extortion. They should be ashamed of themselves. This is another indication of the decline in ethical behavior in business.
If you had a contract that says something other than 60 days, and the company tried to unilaterally change the terms, you need to have your attorney send them a letter indicating you do not agree to the change of terms.
If you didn't have a signed agreement with specific terms:
1) shame on you for not having this.
2) you are out of luck.
Too bad tar and feathering is not longer practiced.
Here is the IRONIC part.....
Sooner or later a new thread will be posted by a CFO/Finance professional asking for advice on how to extend their company's A/P days. I see it as we are in denial that we are "fighting" (outsmarting?) amongst ourselves/each other.
Remember folks, your A/P is someone else's A/R.
2
Hello. So I am that CFO, who recently came to another, new CFO role at a company and am looking to extend out payment terms to our vendors as our cash flow runs very tight at times (large but infrequent inflows of cash throughout the year). We have an line of credit we pull from, but it is currently tapped out until our next inflow comes in, so we are in need of working capital financing. We have many vendors who have less than Net 30 day terms, which makes it difficult when cash is tight. My plan is to push Net 45 day terms to our larger vendors, carve out the smaller "mom & pop" vendors who are less able to absorb this change and then negotiate with those vendors who push back on the Net 45 day terms. Everything is negotiable and it certainly doesn't hurt to ask. those who can absorb will most likely comply, those who can't will push back and we will work with them.
Hey Anonymous, one thing I've seen people do is try to push payments onto corporate credit cards to get an extra 30 days to pay. Some companies you are paying won't want to have to pay the fee, so you can adjust the term from 30 days to 15 days to get them their money faster. Then you have 30 days to pay your CC, which leaves the end result at 45 days vs the original 30 days.
Alan has essentially described what has been going on for decades - very large corporations love free money! They force their small vendors to be unpaid investors in an effort to keep their balance sheet looking positive.
That's all this is.... interest free loans from small businesses.
Filed Under:
Accounting