For all the talk of the need for collaboration between manufacturers and their suppliers, there are situations when their best interests come into direct conflict. 

The disjunction arises especially during tough economic times, when money grows scarce and profitability even more so. That’s when buyers — especially those with leverage over their supplier base — begin stretching out payment terms in order to hold on to their cash. Suddenly, “net 60” becomes 90, 120 or even longer. Often, suppliers find themselves forced to accept a discount off the original invoice if they want to be paid within a reasonable amount of time.

Not surprisingly, the practice of late payment has become rampant in recent years. The COVID-19 pandemic and inflation are two major reasons. According to the latest Payment Practices Barometer Survey by trade credit insurance provider Atradius, an average of 41% of businesses in the U.S., Canada and Mexico trading region reported a deterioration in B2B customer payment practices over the prior year. Survey respondents further reported rising costs for managing accounts receivable in the months following the outbreak of COVID-19. “This may in part be explained by an increase in the percentage of sales made on credit,” Atradius said.

Even worse than late payments are no payments at all. The Atradius report notes that sharply rising energy prices and political unrest “have sent the global inflation figure soaring to a level not seen for decades.” The trend raises the possibility of B2B customers defaulting on payment of invoices. “This is expected to pose a significant threat to profitability, and in the worse-case scenario, a danger of being pushed out of business completely,” Atradius said. 

For most suppliers, however, the more immediate concern is receiving payment in a timely manner. A 2018 survey by Atradius found 88% of companies in Western Europe experiencing frequent late payments. And Allianz Trade, another trade credit insurer known at the time as Euler Hermes, reported in 2018 that global trade credits were overdue by an average of 66 days, a 10% increase over the previous decade. Four years later, the conditions are essentially the same.

From the buyer’s perspective, that’s a positive development, a means of pushing costs upstream in the supply chain. “Companies are strategic about these payment delays, using them for market power or to do this type of cost shifting,” said John R. Birge, professor of operations management at the University of Chicago Booth School of Business, in a 2021 article in Chicago Booth Review. “Late payment is an important part of companies’ financial and operational decision-making.”

Great for buyers; much less so for struggling suppliers. Interruptions or delays in inbound payments “can have a devastating effect on any business, especially [small and medium-sized enterprises] who are more vulnerable to cash-flow challenges,” wrote PJ Bain, chief executive officer of PrimeRevenue, in a blog post from earlier this year. He quoted research by the Hackett Group showing that major U.S. companies took an average of 58 days to pay suppliers in the first quarters of fiscal 2021, an increase of 5.5% from the same period of the previous year. And PrimeRevenue’s own 2021 survey of hundreds of suppliers found nearly half reporting that late payments “were the biggest payment challenges with their customers.” 

“Late payment has always been an issue,” Bain wrote, “but there is newness in the frequency in which it’s happening, and the extent to which it’s affecting suppliers.”

Indications are that inflation might now be on the decline, but that nascent trend hasn’t brought relief to suppliers. Big buyers have to realize that, while slow-paying suppliers yields short-term benefits in the form of cash protection, it can do serious harm to the supplier base over the longer term. “Resilience of suppliers is tremendously important,” said Pat Gang, global head of export and agency finance with Bank of America. He spoke at the recent Global Supply Chain Excellence Summit, conducted by the Marshall School of Business at the University of Southern California.

Gang said it’s crucial to strike a balance between the need for working capital and the health of suppliers. A “happy medium” can be achieved by negotiating the right payment terms, with an eye toward ensuring supplier resilience.

Supply chain finance can play an important role in bridging the gap between buyers and suppliers, getting the latter paid more quickly while maximizing working capital for the former. At the same time, buyers need to adopt a broader view of their supply chains by diversifying their sources of raw materials and components, while taking steps to ensure suppliers’ long-term stability.

All parties need to be willing to shift strategy in line with changing economic conditions, even if the perfect solution remains elusive. What Gang hears most from businesses today is an increasingly common lament: “I really wish I’d had a Plan B for my supplier.”