A fresh approach
Let’s suppose then, that instead of following the crowd and pushing payment terms to their limits, a buyer decided to have its suppliers receive their money as fast as possible.
For a start, the cash flow certainty which this would give suppliers would allow them to reduce the prices they charge the buyer. Not only would they be able to stop taking out the expensive loans, but greater certainty would allow them to invest back into the company. They could reduce costs with new equipment or growing to take advantage of better economies of scale.
The buyer would also quickly gain a reputation as the ‘buyer of choice’ in its market, able to use its reputation as a good client to negotiate better prices from suppliers and attract deals with the best suppliers in the market. A market leading supplier may agree to a large exclusive contract for the promise of guaranteed prompt payment, for example. In this way, paying suppliers on time, or earlier, becomes a significant competitive advantage.
In case you are not sold on the upside to corporates from paying earlier just yet, here is one final thought.
There is also a stark moral dimension to the problem of late payments. After all, how many small businesses have been bankrupted by this late payment culture? How many businesses have closed, people laid-off and how many lives ruined because of these extended payment terms? There is a significant economic and human cost of late payments.
But the commercial incentive for large corporate buyers is just as clear, particularly for those businesses which take the first mover advantage in their vertical.
It’s time to do more than just talk about these problems, we need action.