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How smaller companies get big customers to pay in a timely fashion.
Alix Stuart, CFO Magazine
May 1, 2011
Nearly 80% of companies responding to a recent survey from CFO Research Services say that most or many of their customers are larger than they are, which can certainly make it difficult to negotiate credit terms.
"Unfortunately, there's not a lot that companies with fewer than 100 employees can do against, say, IBM to dictate payment terms," says Andrew Lobsenz, a senior vice president for credit-monitoring firm Dun & Bradstreet. The percentage of business payments that were delinquent (those past due more than 90 days) held steady at around 5% for all of 2010, according to D&B research, still high compared with mid-2007, when the rate was around 2%.
So what's a finance executive to do to keep on top of working capital? With the likes of Wal-Mart and Best Buy among its customers, Brightpoint, a $3.6 billion company that handles distribution and logistics for wireless handset makers, tries to keep most of them on 30-day terms. Still, for a "huge strategic deal," the company might consider extending terms and factoring the receivables, assuming the customer was a good credit risk and the factoring fee would be small, says Vincent Donargo, Brightpoint chief accounting officer and controller.
Alternately, the company might try asking for better terms from suppliers. "If we have an opportunity with a large customer, we'll go to suppliers and say, 'We're not getting paid for 60 or 90 days, so can we pay you in that time?'" Donargo says. That approach often works when the manufacturer wants to do more business with a certain end customer. If neither of those alternatives is viable, though, "we're more likely to walk away from the deal."
Sixty-day terms are becoming more common for Joe Money Machinery, a reseller of heavy construction equipment, much to the chagrin of CFO Ron Box. His bigger customers, largely construction companies and municipal governments, "are either expecting favorable terms from the outset and negotiating them, or are just taking longer to pay."
The company has been offering early-payment discounts for the past year, since soon after Box noticed the payments stretching out. About 30% of customers have taken advantage of the program at some point, "but they don't always do it." Joe Money also tries to encourage the use of corporate credit cards as a payment method, another route that has had limited success.
When things get really bad, corporate collection agencies are always an option, of course. But Robert Williams, founder and CEO of collection agency Williams, Cohen & Gray, offers some tips to avoid that route. "Try to cut off credit when red flags appear, like unreturned phone calls, or claiming fault with the merchandise 30 days after shipment. By the time the company's phone is disconnected, it's too late."
Still, it's never easy. Withholding an order from a long-term customer "is almost a nuclear option," says Box.