Manufacturers, retailers and distributors looking to make better use of working capital have a number of creative options at their disposal. But many prefer simply to slow-pay their suppliers.
A recent survey found 33% of suppliers in the U.S., 34% in Canada and 40% in Mexico expecting an increase in the number of customers who stretch payment to more than 90 days. The numbers are especially high in certain key verticals in the U.S.: 83% of responders in the metals sector, 40% in construction and 33% in electronics are bracing themselves for a further “deterioration” in payment terms.
The results come from the annual Payment Practices Barometer published by Atradius, a provider of trade credit insurance and debt-collection services. David Huey, regional director for the U.S., Canada and Mexico, calls the latest numbers “a clear reversal from last year.” He blames multiple factors, including uncertainties arising from changing government policies on trade, the trade war raging between the U.S. and China, delay in ratification of the United States-Mexico-Canada Agreement (USMCA), and the looming Brexit.
All of which “exposes North American businesses more to the risk of payment defaults from B2B customers,” Huey says. And that state of affairs threatens the cash flow and stability of many suppliers.
Suppliers often are at the mercy of their customers, who tend to be larger entities with the power to dictate terms. The latter also get better borrowing arrangements from banks.
Suppliers, meanwhile, might find themselves relying on one or two major accounts for a significant portion of revenues, even as they face competition on a global scale. “These days we’re in a borderless world,” says Huey. “If you’re not supplying 90-day terms, someone else will.”
The market doesn’t lack for alternative payment methods, such as those offered by Atradius and many others. The credit insurance business, for example, “is going gangbusters,” Huey says. Nevertheless, a significant portion of buyers still prefers to place the burden of optimizing working capital on the shoulders of suppliers, even if such action carries the risk of disrupting supply chains over the long term.
It should comes as no surprise that buyers are experiencing similar pressures for longer payment terms from their own customers. In complex global supply chains, where the buyer is also a supplier, delayed payment by the end customer can have a ripple effect through multiple tiers. In fact, slow payment from a downstream purchaser is the most common explanation by a buyer as to why it’s taking similar action with a supplier, Huey says.
Buyers adopting the slow-pay approach are playing a dangerous game that could yield disastrous consequences when the economy cools down. But suppliers aren’t sitting idle in the meantime. Respondents to the Atradius survey are taking steps to protect their cash flow. Between 30% and 35% of suppliers in the U.S., Canada and Mexico plan to undertake more frequent checks on their buyers’ creditworthiness before offering credit terms, Atradius reports. And between 18% and 28% are building up “bad debts” reserves in anticipation of lengthy collection periods or outright defaults.
The combination of market power and a still-strong economy has prevented most buyers from being punished for their short-sighted behavior to date. “There’s still a great optimism in the U.S. market in particular,” says Huey. Suppliers have yet to demand cash-only deals on a broad scale, even as they grow wary of the ability of buyers to make good on invoices within a reasonable amount of time.
For now, Huey says, suppliers need to step up their game in vetting potential customers — a process that becomes increasingly difficult to carry out in a globalized economy. Most of all, they can’t afford to make decisions based entirely on past relationships with key customers. “History is a good indicator,” he says, “but it’s not a guarantee of continued performance.”
At the same time, certain established customers account for so much business that they need to be retained by the supplier even when stretching payment terms. In such cases, payment might be assured, but the long wait promises to seriously disrupt cash flow. That’s when suppliers need to be considering alternative strategies, such as agreeing to a “dynamic” discount off the invoice in exchange for early payment by the buyer, or selling receivables to a third party that can make good on the debt immediately.
The balance of power between supplier and buyer, and the long-term stability of both parties, can easily shift under changing economic conditions. Higher interest rates would place new pressures on companies that have benefited from access to cheap money for the past few years. And another punishing recession — which most economists view as a question of when, not if — is likely to take down companies that are already operating on perilously thin margins.
That’s when slow-paying buyers could suffer the consequences of their short-sighted behavior. Says Huey: “Everybody’s convinced that the tipping point will come.”
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