Last month, an article in the New York Times found that “Big Companies Pay Later, Squeezing Their Suppliers.”
The article investigates a practice that is widely employed by many big companies, in which they ask suppliers to give them an extended period—as many as four months—to pay their bills. These payment terms are crippling small businesses, essentially turning them into lenders.
One particular supplier had been waiting four months to be paid: “This really had a dreadful effect on our bottom line...and because it hit right in the middle of the recession, it took us about a year and a half to recoup those lost revenues.”
Unaware of the benefits of supplier financing, buyers are imposing extended payment schedules in an attempt to balance their profits and shareholder returns and gain more cash for new projects.
But the majority of suppliers have little financial cushion as banks are tightening up lending to small businesses. It’s difficult for them to manage as it is without this added challenge of having to go months without payment. Not to mention, the resulting additional financing costs work their way into higher prices for customers.
While the New York Times article thoroughly illustrates the strains that such terms can have on small businesses, it doesn’t explore solutions that could eliminate these strains, improve trade relationships, and even maximize profits for both parties.
With services like dynamic discounting, suppliers can be paid earlier in exchange for a small, mutually beneficial discount, improving cash flows for both buyers and suppliers. Suppliers produce the world’s good and services—why should they be forced to wait months before getting paid, jeopardizing their opportunity to grow?