It’s a delicate balancing act to ensure suppliers get paid within a reasonable time frame, but corporate buyers still have an opportunity to benefit from paying their suppliers earlier — usually, by way of an early payment discount.
Even Tony Furman, CEO and founder of BidPay, an online, auction-style invoice discounting platform, said he sees corporations using their position of power to unfairly force discounts or longer payment terms on small suppliers.
“We’ve seen some horrific scenarios where large companies send a letter to their suppliers stating, unilaterally, that now, instead of paying you in 30 days, we’re going to pay you in 120 days,” he explained to PYMNTS. “It’s happening more frequently.”
Not only is it happening more often, but these corporations are also using their extended payment terms to force discounts on suppliers, he said.
“Sometimes, we see these large companies being very opportunistic about their choices to extend payment terms to the point of pain and suffering of their suppliers by then turning around saying, “OK, we’re going to extend payment terms from 30 to 120 days,” Furman continued. “However, if you wish to be paid in 60 days, you have to offer us a, say, 5 percent discount.”
Furman added that this is considered “opportunistic” behavior by corporate buyers and not exactly behavior that helps small suppliers, either. “It’s essentially a forced price increase,” he stated.
But despite a few bad apples, dynamic discounting can benefit both buyer and supplier, Furman said.
That’s especially true in markets like Asia, where suppliers may not have the same access to factoring and supply chain financing solutions that U.S. suppliers see.
“What we discovered is: Once we moved to Asia and we began to understand what the demand for faster payment is in Asian countries, we began to realize our early testing in the U.S. gave us a lot of false negatives with respect to demand,” he explained. “Suppliers in the U.S. have the luxury of being in a country with very developed capital and credit markets. There are lots of alternatives offered by banks; there are marketplace lenders.”
Such developed markets enable small suppliers to receive some type of external support when their corporate buyers extend payment terms or simply when suppliers are facing a credit crunch.
In Asia and other markets, like Eastern Europe and Latin America, the demand for invoice discounting is on the rise, as suppliers look to get their money faster — even if their payment is a bit less than what’s stated on the purchase order, added Furman.
While there are certainly large, multinational corporations that take advantage of the weakened cash position of their small suppliers, forcing significant discounts or extended payment terms, Furman said that he sees a fair share of companies that use invoice discounting solutions solely to benefit the supplier.
“We’ve seen good corporate actors and bad corporate actors, and we think it’s a little bit too minimalistic to say that simply because large companies are stretching their payables that they’re bad guys,” he said. “There are degrees of taking it too far and then of providing options to your suppliers — especially the ones that are cash- and credit-constrained.”
This has been true, the executive noted, for hundreds of years — since the beginning of commerce. Accounts payable is often the largest source of free capital to corporations, Furman said, meaning it’s often in the best interest to reserve AP levels as long as possible.
“Usually one of the largest liabilities on a large company’s balance sheet is accounts payable, and that has historically been one of the largest free sources of financing for companies,” he said, adding that AP exceeds volumes of bank lending or, in some cases, even corporate equity.
“If a company can grow their accounts payable by slowing down payments to their suppliers, on one hand, they are appeasing their shareholders, and on the other, they’re squeezing their suppliers,” he said. “Ultimately, it is up to the buyer to accept or reject discount offers based on their own philosophy about how they treat their suppliers.”
That balancing act of keeping both shareholders and suppliers happy could continue to become more complicated.
While large corporations are giving suppliers an ultimatum — bigger discounts or longer payment terms — the payments space is quickly approaching faster payments. But if suppliers are to join the bandwagon and demand faster payments, someone will have to pay.
“There is a strong correlation between the speed at which a buyer pays its supplier and the cost of doing that,” Furman said. Interest rates continue to be depressed, meaning corporate buyers can access money at affordable rates, while their supplier may not have adequate access to external cash flow support.
But the question of who will ultimately pay for faster payment — that is, whether corporate buyers will take on the burden of paying suppliers faster or whether suppliers will continue to be forced to discount their prices to get paid more quickly — is difficult to say.
What Furman said he does know, however, is that the U.S. Federal Reserve’s expected plans to, once again, raise the federal interest rates later this year are likely to put the cost of faster supplier payments at the top of corporate priority lists.
“I think you’ll see more movement in how companies are thinking about faster payments and who’s going to pay for those faster payments,” he said. “But I certainly don’t have a crystal ball.”