Surprise! The Wall Street Journal says, “Big Firms Are Quick to Collect, Slow to Pay.”
If you sell goods and/or services to large corporations, you don’t need The Wall Street Journal to state the obvious that large companies are extending the time it takes to make payments. Many large companies are increasingly utilizing their purchasing power to force extended terms on their suppliers. According to the Journal, companies with greater than $5B in sales pay in an average of 56 days while smaller companies pay in an average of 40 days. Many large companies are requiring payment terms of 60 days and greater.
Is this a new phenomenon? No. Historically, accounts payable have been the largest source of capital for most businesses in America. Generally, these businesses owe their suppliers more than they owe their banks. Furthermore, this financing is free to the business buyer. If a business buys on 30 day terms but pays in 45 days (a 50% extension), they are generally never charged interest. Thus, with this precedent set, it only makes sense for buyers to demand even more favorable terms—particularly if they have the purchasing power of a large buyer. This is further exacerbated by the fact that the credit markets have tightened for large companies that formerly issued commercial paper or utilized other financing vehicles. More than ever, they are now relying on Main Street (i.e. their small business suppliers) to finance their businesses.
How long will this last and what should small businesses do? Get used to it. The credit markets, while improving, may not provide ease of access to credit as in the past. Additionally, large companies are likely to continue to leverage their newly “rediscovered” purchasing power. As a result, small businesses should embrace professional credit management and accounts receivable management. Firms such as FTRANS provide these services at scale economies giving small companies the ability to manage their credit and collections processes as professionally as large companies. Additionally, when properly managed, receivables can be effectively used as collateral for payment advances which diminishes the burden of providing increased payment terms.
