Magazine article Business Credit

Terms Pushback Strategy Gets Political: Is the White House Now Protecting Suppliers from Customers' Unilaterally-Imposed Extended Terms?

Magazine article Business Credit

Terms Pushback Strategy Gets Political: Is the White House Now Protecting Suppliers from Customers' Unilaterally-Imposed Extended Terms?

Article excerpt

A payment trend affecting credit teams across all industries is a customers use of the formal terms pushback strategy (TPS), in which a customer disregards its supplier-set trade terms and extends these terms to better fit its working capital and cash flow needs. Customers may characterize the TPS as supply chain management. Given that the small supplier has little negotiating leverage where an indispensable customer adopts a TPS, the White House has stepped in to try and protect the small supplier in the private sector from the downside of a TPS rollout by introducing the SupplierPay program. This voluntary program encourages companies to reduce their credit terms with small suppliers or to offer their small suppliers alternative financing arrangements (such as structured finance). This article considers the general TPS trend, how TPS affects a supplier's bottom line and what the SupplierPay program means for suppliers.

The TPS Trend

The Motivation for Extending Terms

The significance of trade credit in supplementing a customer's working capital is self-evident. Absent trade credit, a customer faces a cash flow drain as they pay suppliers for their goods and services in advance of the customer's sale of the finished product or service to the end user. To ease the cash constraints that come with cash-in-advance (CIA) purchases, the customer may seek bank financing, but this form of financing significantly adds to the customer's operating expense.

When a supplier sells on credit instead of CIA, the customer is granted additional time to pay the supplier after receiving the goods or services. If credit terms are long enough, the customer may match its payment obligation with the supplier to the sale of its own goods or services, thus resulting in positive cash flow. Customers have discovered, however, that their cash flow improves and their working capital increases dramatically in many instances by pushing suppliers from normal to extended terms.

Has TPS Become a Best Practice for the Large Customer?

Private US companies report a 14.3 day increase in their average accounts receivable days (37.5-51.8 days) from 2012 to 2013. From the customer's point of view, TPS is attractive as it allows the customer to increase its liquidity by reducing cash tied up with its suppliers as well as reducing its reliance on more expensive bank financing. Trade credit is an interest-free loan for customers.

The Small Supplier as an Involuntary Working Capital Lender

Large companies appreciate that smaller suppliers likely need their business more than they need the small supplier. This leverage in the trade relationship allows large customers to unilaterally dictate credit terms to their suppliers. Proctor & Gamble Co., for example, extended supplier payment terms across its entire supply base from 45 days to 75 days, while Anheuser-Busch InBev pushed its days payable outstanding (DPO) from 30 days to 120 days.

Where a larger supplier (less reliant on the customer's business) could more effectively rebuff the TPS, smaller suppliers are often unwilling to lose such a large and reliable revenue stream and comply with it. But as a supplier's days sales outstanding (DSO) grows, so do the gaps in a supplier's cash flow. With the extended terms, the small suppliers may have difficulty purchasing inventory or meeting payroll. If the gaps in cash flow grow too wide to support operations, a supplier may be forced to borrow even larger amounts from third party sources at costly rates. There is a dramatic difference with the cost of capital, or borrowing costs, between the large supplier and the small supplier. The large supplier commonly has access to financing at about 3%, while the small supplier may have interest rate up to 20%. The President's SupplierPay proposal is based on improving a supplier's cash flow through shorter credit terms from key customers allowing the small supplier to hire more workers thereby improving the US economy. …

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