Why suppliers have had enough of being treated like a bank

Suppliers confronted with newly extended payment terms from belt-tightening customers might hear the ghost of Michael Corleone whispering in their ear: “It’s not personal; it’s strictly business.”

That may well be true, but shafting suppliers is bad business. And yet it’s become an almost iron law of economics: when the economy sours, inflation bites and interest rates rise, buyers begin to slow down payments to their suppliers. Almost overnight, suppliers, especially the smaller ones, find themselves last on the long list of buyers’ payment priorities.

What’s worse is that suppliers find themselves financing their customers with what amounts to a forced loan on the most unfavourable terms. To plug the cash flow gap and pay the costs of storing inventory, sellers often turn to expensive forms of financing.

Even in a low-interest-rate environment, the borrowing costs for a small or medium sized business (SMB) can be above 20 percent APR—and that’s assuming they’re even eligible. For an SMB applying for a business loan at a traditional US lender only about 40 percent of applications make it to approval.

Data from Tradeshift’s quarterly Index of Global Trade Health shows late payments are double the level they were in the six months before the pandemic. But this isn’t just a problem for suppliers: late payments harm everyone.

A culture of complacency

There are any number reasons why buyers should be cautious about delaying payments to their suppliers, many of them glaringly obvious. If a supplier goes to the wall, there’s the disruption of finding, vetting, and onboarding new ones. Then there’s the reputational hit, both from the supplier ecosystem and from buyers’ own customers — many of them struggling themselves — who can easily identify with the underdog and boycott a brand that doesn’t pay its bills.

And that’s without considering the macroeconomics. If you strangle suppliers, they cut spending and lay off employees; this further entrenches inflation as the supply-demand gap widens. Extending payment terms may be an instinctive reaction to an inflationary era, but it’s a colossal act of self-harm against the global economy.

How did it come to this?

The financial stability of the last few decades (US inflation did not exceed 3.8 percent between 2000-19) led to a culture of complacency in corporate capital management. Today’s generation of CFOs — speaking broadly — lack the experience of managing an environment where the cost of goods and the cost of capital are both rising. That is changing as capital becomes harder and more expensive to access; however, stretching payment terms is a blunt tool that ends up injuring everyone.

The road to better payments

There’s no easy answer to all this. It’s going to take much creativity and hard work to improve the way buyers manage their capital. Technology will play a major role, and the good news is that digital is already showing tremendous promise, not just in optimizing payments but in restoring the health of buyer-supplier relationships.

Take supplier financing, a program run by buyers (often in partnership with a major financial institution) that offers participants more flexible terms, including the option of early payment in exchange for a discount. Supplier financing has been unlocking liquidity within the supply chain for a while now, and it’s starting to evolve in some fascinating directions.

One development that shows enormous promise is embedded finance, where non-financial companies like trading platforms partner with banks to introduce new financial services onto their platforms. Applications include P2P lending, invoice financing, flexible and tailored payments terms, but there are many, many more. These represent a much cheaper and more reliable source of capital than relying on credit, while being far less destructive to strategic relationships compared to leaning on the supplier.

Resilient relationships

For all the talk of “building back better”, buyer-supplier relations remain rocky. One of the biggest problems is transparency, with legacy systems an obstacle to clear communication between partners. But when they are connected on the same digital platform, they gain access to transformative services like supplier financing and the ability to share data with suppliers, making it easier to analyze risks associated with funding transactions across the supply chain.

As Rob van Ipenburg, co-founder and managing partner at Quyntess pointed out in our latest Index, “…more agile [buyers] have been able to turn volatility to their advantage in order to gain market share from competitors who were less able to remain collaborative with their suppliers.”

The crises of the last few years have shown the urgency of injecting liquidity into the supply chain, and for businesses to improve capital management. Digital will play a crucial role, binding buyers, and suppliers more tightly and transparently, while providing a range of new financial applications and lines of credit. In today’s precarious economic climate, that’s an offer you can’t refuse.