There has been a lot in the press lately concerning the issues small and medium-sized businesses (SMEs) are facing with their payment terms being extended by customers.
It is not uncommon to hear cases of businesses being told – usually by larger customers – that they are being moved from 30 to 60 or even 90 day arrangements.
Sometimes, a customer will tell a supplier that they can remain on their current payment terms but will need to give it an attractive incentive to do so, for example a discounting of their invoice in return for prompt payment.
Earlier this year, the car and bicycle retailer Halfords made the news when it was revealed it had contacted its suppliers asking them to pay up to 10 per cent of their annual sales with the company to fund its £100 million store modernisation programme.
The Government has so far steered clear of measures to bring businesses into line, but Business Secretary Vince Cable did suggest that the time may have come for big businesses to publish their payment terms in order to bring about greater transparency.
Whenever clients ask me for advice on how to tackle the issue of businesses trying to extend payment terms, I offer the following guidance:
- Do you want the business? Having your payment terms extended will present you with a funding cost while you wait for payment;
- Are you better off concentrating your efforts on the clients who are happy to meet your existing payment terms?
- Have you talked to your customer to find out why they are looking to extend your payment terms? Are there underlying issues in their business – in which case you may not want business of this kind – or are they simply not valuing the services or products you provide them with?
Value is a really important word in all of this. On more than one occasion, I have urged clients to pick up the phone to a customer who is threatening to extend payment terms and ask them: “Do you value what we do for you?”
Value is an extremely precious commodity in any business relationship and has to work both ways. It is an unhealthy and slippery slope if a supplier accepts the dominance of its customer.
As mentioned earlier, it is often the case that an extension of payment terms masks much deeper issues in a business. If they tell you that they are punishing you because they are being given extended payment terms, then it is important to stress that you are a business, not a bank, and as such cannot afford to shoulder someone else’s debts.
Extending your payment terms may be an attempt to disguise the fact that your customer’s business is poorly managed itself.
The starting point as soon as the issue raises its head is to get on the phone and have a full and frank conversation with your customer to find out why they are presenting you with new terms.
After this, you either need to fight to get your customer to understand that such a move is unacceptable or, if you believe your time is better spent elsewhere, walk away from the business and channel your energy and efforts on the customers who demonstrate that they value the work you do on their behalf.
For an initial free, confidential consultation, please contact Phil Bates on 0151 353 0003.