Retailers can’t embrace independent suppliers until they tackle payment terms

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Paul Christensen, CEO and co-founder of Previse, writes about the need for retailers to become more flexible about their payment terms if they are to engage with the best independent suppliers in their markets

It’s many entrepreneurs’ dream; that first big contract which launches your start-up brand onto the national stage. It should be time to celebrate your success, but for many small firms this is the start of a new financial nightmare.

Many large retailers operate standard 60 to 90-day payment terms and around a third of retailers pay later than the agreed terms. According to Previse research, SME suppliers to large retailers are paid a full 46 days later than the largest sellers. For small firms without the financial backing to sustain this hit to their cash-flow, working with these retailers can be impossible.

This was the situation faced by Ed Vickers’s company Jollie’s. Jollie’s is a sock company with a difference. It is committed to giving one pair of socks to a homeless shelter for every pair of socks it sells. The social enterprise runs a direct to consumer online shop and subscription service, but it also works with high street retailers.

Quickly, the company secured its first big retailers, household names that could propel Jollie’s into a new phase of its growth and development as a company. Unfortunately, however, initial excitement quickly turned to frustration for Ed. Long payment terms meant that the start-up made it difficult to pay its own suppliers. He didn’t have the cash-flow to invest in growing his product range, running new marketing campaigns or hiring new staff. “We just had to sit on our hands and wait for that amazing day when we’d finally get paid,” said Ed. “It was really difficult from a confidence perspective in terms of investing in the future of the business.”

In the end, Ed had to make the decision to scale back and work with smaller independent retailers who could be more flexible in accommodating payment terms which would allow him to continue to grow Jollie’s. But this wasn’t without its challenges as well.

“It wasn’t scalable. We couldn’t build a sustainable business off of independents. We were caught between wanting to work with bigger companies who were interested in our product on the one side and our cash-flow on the other.” Ed added.

In the end, this meant that no one won. Jollie’s was unable to grow as quickly as its potential would allow, while retailers who wanted to stock and sell their socks couldn’t because it wasn’t feasible to organise payment on terms which are practical for small suppliers.

Ed’s situation is by no means unusual. I’ve spoken with many many small business owners with very similar stories. Helen Cockle, for example, founder of fintech for SMEs Futrli, told me about her experience working with large retailers when she ran a fashion line.

“A big high-street department store made an order for our Spring / Summer stock. Of course, we wanted to take the opportunity so we were flexible and agreed to payment terms. Then it started to creep towards 110 days, then 120 days,” she remembers. “We were wasting so much time trying to chase the invoice and, in the end, we couldn’t fulfil our payments to suppliers for our Autumn / Winter stock. Our shipment was stuck in India.”

Helen and her co-founder had to take drastic steps, all to common for small business founders, and take out significant amounts of personal debt on credit cards and loans to make their bills and deliver their orders for the new line. “We couldn’t pay ourselves for two months, it was really tough,” Helen said. Even so, they had to cancel a number of orders for the Autumn line.

This is a big challenge for both buyers and suppliers alike. There is growing demand among consumers across a whole range of product categories for products from independent companies, as evidenced by the continued rise of craft alcohol brands and increasing consumer awareness about the sustainability and ethics of product sourcing. All this means that retailers have never been so keen to work with smaller sellers, yet their own payment terms mean that securing contracts with the best independent suppliers can be very difficult.

It isn’t as simple as flicking a switch and suddenly paying small suppliers months earlier, either. Invoice approval and payment is an extremely manually intensive process and cash-flow forecasts are carefully balanced on certain expectations around supplier payments. Technology can play a pivotal role here, enabling early payment programs which can get suppliers paid straight away while mitigating the risks to retailers’ cash-flow through the use of data analytics and payment insurance.

Firms should apply urgent and serious thought to how they can make their payments more flexible. Doing so will create huge opportunities for independent sellers and allow retailers to continue to meet shoppers ever-higher demands for quality, interesting products.

Long payment terms are a widespread issue across industries. We will have the same issues again for hundreds of thousands of SMEs with the next bankruptcy of a large corporate, unless the underlying causes of slow payments are addressed across the economy.

“A big high-street department store made an order for our Spring / Summer stock. Of course, we wanted to take the opportunity so we were flexible and agreed to payment terms. Then it started to creep towards 110 days, then 120 days,” she remembers. “We were wasting so much time trying to chase the invoice and, in the end, we couldn’t fulfil our payments to suppliers for our Autumn / Winter stock. Our shipment was stuck in India.”

Helen and her co-founder had to take drastic steps, all to common for small business founders, and take out significant amounts of personal debt on credit cards and loans to make their bills and deliver their orders for the new line. “We couldn’t pay ourselves for two months, it was really tough,” Helen said. Even so, they had to cancel a number of orders for the Autumn line.

This is a big challenge for both buyers and suppliers alike. There is growing demand among consumers across a whole range of product categories for products from independent companies, as evidenced by the continued rise of craft alcohol brands and increasing consumer awareness about the sustainability and ethics of product sourcing. All this means that retailers have never been so keen to work with smaller sellers, yet their own payment terms mean that securing contracts with the best independent suppliers can be very difficult.

It isn’t as simple as flicking a switch and suddenly paying small suppliers months earlier, either. Invoice approval and payment is an extremely manually intensive process and cash-flow forecasts are carefully balanced on certain expectations around supplier payments. Technology can play a pivotal role here, enabling early payment programs which can get suppliers paid straight away while mitigating the risks to retailers’ cash-flow through the use of data analytics and payment insurance.

Firms should apply urgent and serious thought to how they can make their payments more flexible. Doing so will create huge opportunities for independent sellers and allow retailers to continue to meet shoppers ever-higher demands for quality, interesting products.

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