Is The Late Payments Bubble About To Burst?

Supplier payment policies got tough soon after the financial crisis. But according to new research from best practices business research firm APQC, many of those practices remain in place today, even in the midst of economic recovery.

A new report from the company, published Monday (Nov. 2), found that, most prominently, the extended payment terms many corporations imposed upon their suppliers in 2008 have not gotten any shorter since.

Analysts say the consequences for suppliers are “dire.”

According to APQC, 57 percent of survey respondents said they will likely have to leave the market because of these extended payment terms. Researchers found that longer supplier payment cycles mean these businesses can’t hire new staff, give their existing staff raises or grow their business overall.

Specifically, 54 percent of suppliers surveyed said they cannot expand their operations because they are forced to deal with longer payment terms.

Commentary from surveyed suppliers includes anecdotes about payment terms being extended without notice or negotiation, buyers that take up to 120 days to pay or companies that gradually take longer and longer to pay their bills.

No Longer In Desperate Times

The decision by many companies to stretch out their payment timelines following the financial crisis was not altogether unexpected. Today, the boom in financing options for suppliers means they can access alternative loans, invoice financing and other financial services, all aimed at helping them manage their working capital while they wait to get paid. These industry players know that corporate buyers extending their payment cycles is a way to manage their own liquidity.

But according to analysts at APQC, while it may have been understandable in the 2008 financial crisis to depend on longer supplier payment terms to manage finances, corporate buyers today are no longer in desperate times yet are still deploying these tactics that researchers said put a strain on suppliers.

Analysts found that 67 percent of respondents said their corporate customers have good cash flow yet still cite the desire to improve working capital flow. Further, 45 percent of respondents said they believe their buyers are extending payment terms simply to improve their profit profiles.

A Bubble About To Burst?

While longer payment terms have largely been viewed as a necessary evil that suppliers have to deal with, researchers at APQC said that suppliers are beginning to signal a potential bubble in the market.

[bctt tweet=”Suppliers are beginning to signal a potential bubble in the market.”]

“At the end of the day, it’s understandable that large companies are dedicated to cash flow efficiency,” said APQC Senior Research Fellow of Financial Management Mary Driscoll in a statement. “But when that dedication devolves into callousness toward vulnerable suppliers, everybody — even the largest customers — will eventually lose.”

According to the research, 74 percent of suppliers said that late payments will result in price increases, and 72 percent said they believe their corporate buyers will ultimately pay the price as a direct consequence of these longer payment cycles.

While research may bring awareness to such a rising problem, Driscoll added that the topic is often considered taboo and that many small suppliers are either fearful of talking out against late payments or encouraged against it.

“The subject of extending payment terms is a very sensitive one, with many small business CEOs unwilling to go on the record for fear of offending their large corporate clientele or setting off alarm bells with lenders and employees,” Driscoll said.

However, analysts at APQC suggest that the issue may not be able to be swept under the rug for much longer.

“Our findings confirm that the practice of extending payment terms has negative consequences for both supplier companies and for the economy as a whole, as 54 percent of respondents indicate that extended terms are likely to inhibit their ability to expand their businesses,” Driscoll added. “As they respond in a similar fashion with their suppliers, a ripple effect up and down the supply chain is created and eventually even the largest companies will be negatively impacted.”