Monday 27 April 2009

Prompt business payment can benefit the buyer as well as the supplier?

A recent letter to the Telegraph by Institute of Directors, Forum of Private Business, Confederation of British Industry, British Chambers of Commerce, the Institute of Credit Management, and the Federation of Small Businesses, lists possible financial benefits throughout the supply chain in making prompt business payments.
'Prompt payment helps establish the best customer-supplier relationships, and enables customers to negotiate better deals and avoid late-payment interest charges. Prompt payment gives a signal to the market of confidence and financial wellbeing that in turn promotes further business opportunities and growth'.
Unfortunately, we believe that the letter misses the point, especially within the retail sector.
In our opinion payment terms are about power and need. Power comes from relative sizes of supplier and customer. In other words given the size of a major customer, accounting for 5% or more of a supplier's business, a supplier has no alternative but to await payment in an agreed period, and succumb if a retailer decides to to extend that period, or forgoe the business. Given that trade credit is an interest-free loan given to the customer, and a status quo has been established (say 30 days) then a retailer is unlikely to pay earlier without a concession of equivalent value in exchange.
Essentially, a retailer has three choices: invest money in a new store, deposit it in a bank or pay a supplier. The supplier simply has to demonstrate that their offer of an early payment discount exceeds the retailer's other two alternatives in order to secure earlier payment.
The only other possible approach is for the supplier to represent a niche market via a product that the retailer 'needs' to an extent that the retailer is prepared to compromise on their normal trading terms… Even then the supplier has to be watchful that competitors are not attracted into their niche area, thus weakening their 'solus' advantage… (Use our Buying Mix Analysis tool to assess the risk)
Unfortunately, awaiting help via government intervention requires a degree of lung-capacity beyond the capacity of most real-world suppliers…

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