It’s the new normal: big companies are paying their bills late, later, and latest.

When economic hard times hit in 2007–2008, CFOs and finance departments felt pressure to improve their organizations’ working capital positions. The longer companies could hold on to cash, the more liquid they were, and the safer they felt. Paying bills quickly meant dipping into cash reserves, possibly taking away money from new-product development, mergers and acquisitions, marketing, or anything else that might drive top-line revenue. It was either that or be forced to rely for growth on expensive external financing.

Everyone knew that when it came to days payable outstanding, longer was better.

However, before the recession, many companies were reluctant to embark on payment-term extension programs for fear of disrupting their supply chains, losing suppliers, or forcing them to raise their prices. But in the face of what looked like economic Armageddon, such considerations seemed less compelling than bolstering working capital. Therefore, many large companies began telling suppliers (especially the smaller ones providing noncore or indirect goods and services) that payment schedules would be extended from 30 days to 45 days, or from 60 days to 90 days, and sometimes beyond.

To their surprise, it worked.

According to Veronica Heald, Hackett group director and practice leader at REL Consultancy, which focuses on working capital, those big companies experienced “not nearly as much pushback from suppliers as they expected.”

During the financial crisis, she explains, small businesses, losing revenue, were afraid to challenge their big customers, and so bit the bullet and accepted whatever payment terms were offered. Today, big businesses are sitting on mountains of cash, and delaying payments as long as possible has become, as Heald says, “the new normal. Lots of organizations survived the downturn by getting smarter. They went through cost-cutting; improved working capital, and saw the benefits of extending payables.” Today, she says, extending payables is a best practice, and a good way to grow cash mountain.

Not coincidentally, according to a 2012 Experian/Moody’s Small Business Credit Index study, severe delinquencies (invoices more than 90 days past due) climbed 11% in the first three quarters of 2011. And as a 2012 National Federation of Independent Business report says, purchasers “want to extend payment as long as possible. . . . This is one area where large firms often take advantage of their market power to strong-arm small-business suppliers and customers.”

“The practices of the downturn have turned into business as usual,” says Larry Marion, chief executive officer of Triangle Publishing Services, which produces reports, white papers, and custom publications for midsize and Fortune 500 businesses. “Just last week,” Marion says, “a customer of many years who had been paying on a 30-day schedule tried to change the contractual language for all new projects to 60 days.

“That same week,” he continues, “I noticed a 30-day payment had not shown up. I contacted the accounts-payable department and they said that’s scheduled for 45 days. I said, ‘No, I have an agreement.’ They said 45 days was their policy.”

What did Marion do? In the first case, he told his client that his quote was based on 30 days, not 60, and if it had to be 60, he’d have to increase his quote by 10%. “It went back to 30 days,” he says.

In the latter case, he circumvented accounts payable, spoke directly with his client, and told him he’d like to bill him earlier. “Instead of getting paid when we finish,” Marion proposed, “I’ll bill you when we’re halfway finished to recover from the 45 days.” The client accepted Marion’s terms.

Heald applauds Marion’s gumption. “Don’t accept the customer’s terms as a foregone conclusion,” she advises. “When companies embark on payment-term pushback programs, they’re expecting resistance. Sometimes, if the supplier complains, they’ll just put [it] back on the old program. I’ve seen this from huge, huge corporations. They don’t have the desire to manage negotiations. They’re just hoping 80% or so of their suppliers will accept it without complaint.”

Heald and Marion have the following seven strategic suggestions for how small businesses can resist extended payment terms and negotiate with their larger customers.

  1. Respect yourself. “You might be small, but you may be providing a unique value that can’t be replaced,” says Heald. “Know your competitive advantage with respect to other suppliers. Do you have a longstanding, successful relationship with the buyer? Are you cheaper? Maybe the buyer has nowhere else to go. Feel good about yourself.” Don’t assume you’re at your customer’s mercy.
  2. Know yourself. Small businesses, Heald says, should know whether they’re a part of their buyer’s direct or indirect spend. If what you do directly affects your customer’s business, you have more leverage in negotiations. If what you provide is a commodity (paper clips, coffee cups, chairs), “you’re more at risk. In either case, you should know your competition,” she says.
  3. Work the price. Heald suggests that a cash-flow-challenged business can offer early payment discounts. If, for example, your buyer wants to extend payments from 30 days to 60 days, you could offer a 2% cut in price if the buyer pays in 20 days. Marion is less than enthusiastic about that strategy. “I’m not that desperate to take that 2% haircut to get paid faster,” he says. On the other hand, if you’re a service provider, Marion suggests creating multiple, billable milestones. “Typically, the person you’re negotiating with has a budget for the project,” he says. “How it’s divided up is not his concern. If he’s got $50,000 for a project, he doesn’t care if it’s paid out in three or four stages, $20,000/$15,000/$15,000 or $20,000 and then three payments of $10,000. Manipulate something that matters to you, not to them.”
  4. Avoid your customer’s accounts-payable department. “I would want to go to the procurement and buying organization, not the finance organization,” Heald says. “Finance wants to improve working capital; it sees all sellers as the same. Procurement will understand you better.” And, says Marion, “Focus on your client. Realize that AP and your client have very different interests. AP is incentivized to improve cash-flow metrics. That’s all. Your client, you have a relationship with. Let him worry about AP.”
  5. Let accountants talk to accountants. When a business is telling you it’s planning to pay you late, that can wreak havoc with business and your mental equilibrium. To get emotion out of it, Marion suggests having someone else deal with collectibles. “If you have an accountant or bookkeeper, have [him] make the call to AP,” he says. “An accountant speaking to another accountant, they speak the same language.”
  6. Know the history of the relationship. Heald emphasizes that it’s important to know how your customer has been paying you. “If you’re on a 30-day program and the buyer has been paying after 60 days, and now it wants to move you to 60 days, well, it doesn’t really have much of an impact on your business. Or, you could say, ‘You already have been paying me extremely late.’” There’s no harm, says Heald, in trying to “shame” your customer.
  7. Suggest financing. In cases where getting paid late puts your business in a bind, and your customer is not willing to negotiate, Heald suggests asking if your customer is willing to enter into a supply-chain-financing agreement. In this process, your send your invoice (say it’s for $100) to a bank-managed portal. The bank immediately pays you $98 for the $100 invoice, no waiting. Your customer pays the bank $100 in 30 (or 45 or 60) days. Heald believes this arrangement will grow in popularity in coming years as everyone (the small-business supplier that gets paid quickly; the bank that collects a fee; and the buyer that pays at a working capital–friendly pace) can benefit.

There are electronic procurement platforms, such as Ariba’s, that allow for automated dynamic discounting, in which a supplier can say, “If you pay me on day 10, take a 2% discount; if you pay me on day 20, no discount; and if you pay me on day 30, the price rises.” But this requires the technology to get on the platform or others like it. If that’s not feasible, Heald strongly urges small-business people to “pursue every avenue” to resist extended payment terms “without being overly aggressive. Think strategically. Ask yourself how you can connect with someone who’s willing to compromise; who’s willing to work something out.”

Remember: it’s always a hassle for your customer to find a new (and good) supplier.

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14 responses to “When Your Big Customer Wants to Pay Late”

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  2. Are you kidding me at low interest rates companies can’t borrow to pay on time based on liquidity they are hoping their suppliers will bend and give in and hope that they do their bidding it’s a farce a game aswell suppliers should head warning to others the moment they realize they are gamed

  3. It is the small supplier that always gets hurt. They go from week-to-week and have to pay their bills when they are due and must frequently borrow from the bank since the “larger” companies think they can write their own rules. It has been going on for a long time, but is getting worse.

  4. I’m an independent media and public speaking trainer and consultant. A few weeks ago the CEO of a Global 500 company was referred to me by another client. We spoke by phone about the training and the fee and he verbally hired me. I then sent my service agreement for signature that stated payment was due upon receipt of invoice along with a pre-training questionnaire. A couple of weeks later his assistant sent me an email saying the pre-training info was on its way and then casually mentioned that they were in the process of “moving to 90 day payment terms.” I replied that my terms are payment upon receipt of invoice and my fee is based on those terms. I added that is how I can offer fees much lower than big firms with similar services. I said waiting a full quarter for payment hurts my working capital. I said I hoped this 90 day payment term was flexible and I can be paid as stated in my service agreement. If not, the fee would increase 15% and I would be happy to send a new service agreement with the new fee. This was sent to the assistant Tuesday evening. It is now Thursday and I’ve not heard back yet. I may lose the job but I am going to stand my ground and not be bullied by big companies. This is how the gap between the super wealthy and everyone else who is working hard is getting bigger and bigger. This greedy mentally is ruining America. I want to ask the CEO, “Would you be happy with someone telling you that they were going to hold $XX K of your paycheck for 3 months? Do they allow customers to go to the store and pick up their famous product and say, ‘ but I’m not going to pay for this for 90 days’ ??

    • Quite right. “Standard 90 day payment” is their internal problem, not yours, and the correct response is to help them to understand how much 90 days credit will cost.

  5. I agree that larger customers are indeed taking unfair advantage of under capitalized,small business owners.It is quite correct to say they do it,because they know that they can.I have had customers who used to pay net 30-45 terms.Those days are rapidly vanishing,leaving we small business owners crunched for cash flow.Is this fair?No it isn’t,but this is the way business is getting done,in the 21st century.Between the lag times for customers to pay,and the indifference of the banks,towards the needs of small companies,the average small business owner,will likely cease to exist,by the end of this century,if not sooner.

  6. We are constantly at war with 60-90 day terms. The new terms I’ve seen lately are 75 days after month-end. It’s absurd, but expected. We offset much of holding costs negotiating discounts with our commodity vendor, but you can only squeeze so much blood from a turnip.

    Something that has worked well for us in the past is the moment a customer demands longer terms, we revise our sales program to find a lucrative replacement. Sometimes, relationships mean more than replacing difficult customers with more lucrative contracts; however, there comes a point you owe your employees and yourself the opportunity to remain solvent. A relationship is a two-way street.

    • A simple solution to those long payment terms may be to utilize an Alternative Financing tool known as A/R Funding or Invoice Funding. Your company could receive up to 90% of the invoice amount typically the same day it is created. The remaining 10% would be remitted back to your company once the invoice was paid, less a small service fee. So, If your customer requested to use their credit card to pay for your company’s services/products…would you say yes. If so this may be a solution.

  7. There is a simple fix. Pass legislation requiring all publicly traded corporations to pay their bills in 30 days or less.

  8. And this is one of the cornerstones of Capitalism that is in dire need of reform. Net 30, 45, 90, whatever… These were put in place not to be administered as payment plans for vendors r workers, but as a method of financing loans given on Credit. Vendors are not creditors!

    We do Net5 on short projects and Net15 on larger ones, with the very odd exception of Net30 for big AND long term projects. Additionally, depending on factors (company profile, payment regimen, and industry reputation) we require a deposit of 1/4 to 1/3 up front. This is the best (and honestly only) way to ensure a committal from the client that lasts the duration of the project, and ensures at the very least we get our dead operating cost out before final delivery.

    If a client wont work within these constraints say ‘ba-bye’; we don’t waste time on clients who waste our time and undervalue our service. Life is too short.

  9. We work with quite a few ‘state agencies’ and are finding that even thought they agree to Net 30 terms they are still taking 60-90 days to pay. Their latest statement is that the AP service center has 30 days to pay from the time that the site ‘approves’ the invoice .. while the site takes 30-45 days to approve it …

  10. I run a decent sized staffing company. I am infuriated.

    This company received the agreements, and I left voicemails, put together a crew of 12 plus 4 on standby. The agreement clearly says “daily payment is preferred”. On voicemail, I left a detailed message and suggested that we do daily payment until Monday when the different crews were up and running, then we might switch to weekly, with the weekend crews paid on Sunday, but we could discuss it.

    Then, at the 11th hour (10:25am) the day we were supposed to start working, he asks me to bring a modified agreement with pay bi-weekly. I told him that the guys would not like that, but at least if he could pay us at the end of day for today’s work, we could work something else out, which he refused.

    I take electronic transfer, all major credit cards. The only thing I don’t take is cheques.

    I strongly suggested to the guy as a last resort that he could simply leave a credit card on file, as I am the one paying each of the employees anyway.

    He played the bully and said “Maybe another time”. Given that it is Christmas season I can’t reasonably change the terms so dramatically mere hours before everyone was supposed to leave, and that it might be difficult to get ahold of them even. I managed to get ahold of them, and they all pulled out.

    This ***** angered a bunch of my best people, me, and now he is out an entire crew that took quite some time to put together.

    Lesson learned. He probably didn’t have the money or as the article states wanted to hoard the cash. Some general contractors have poor cash flow management and use the deposit from the job to pay the subcontractors for the last job.

  11. Maybe off Subject but I believe I have the right audience. We are a small DSD perishable company. We have mainly Net 30 terms. I have a few questions I was hoping someone could help me with: 1. How long past due before you put a customer on credit hold? 2. Is there a % of sales one should be past due before putting them on credit hold? 3. What is the threshold $ amount of disputes that normal companies used (i.e. An invoice is short-paid by $X before I start looking into in rather than writing it off? Thanks for the Help.

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