A supplier sends its invoice to a company for services provided. The company pays the invoice by the stated deadline, and everyone is happy. In an ideal world, this is how the payment process would work. Unfortunately, paying suppliers late is all too common, particularly when there’s an imbalance of power. Why can large firms delay payments to their suppliers, and are there any advantages to this practice? We’ll explore this question below.
Paying suppliers late: a growing trend
The US’s largest companies have long made it standard practice to delay payments to suppliers in a bid to extend their own working capital. While this was already a trend, the economic uncertainty of the pandemic has accelerated the incidence of these delayed payments. According to research from The Hackett Group’s latest Working Capital Survey, the country’s 1000 largest companies dramatically slowed down payments to their suppliers in 2020. With drops in revenue due to a stalled economy, many companies strategically paid smaller suppliers late in a bid to protect their own cash flow.
Despite the acceleration, this trend is nothing new. Up to 90% of suppliers report regular late payments, particularly from their largest customers. Businesses possessing more market power due to their size hold the upper hand over smaller suppliers, meaning they can delay invoices with little penalty.
Why can large firms delay payments to their suppliers?
Market share and importance is one of the determining factors behind paying suppliers late. This practice is part of the trade credit arrangement, in which suppliers enter an informal contract with their customers. It’s similar to a consumer credit agreement. As consumers, we can make a purchase now and pay later according to our payment plan. Companies, like consumers, enter trade credit agreements allowing them to pay for goods and services later.
Suppliers are then put in the position of being B2B lenders as well as B2B vendors, a position many are not prepared to fight. A small business can charge late fees for delayed payments, but for large companies, these fees are small potatoes – and so the late payments continue.
Advantages and disadvantages of delaying payments to suppliers
The main benefit of paying suppliers late is clear to see. By holding onto their cash for a little while longer, large companies can put it to use in other areas of the business as needed. They can stimulate growth and work on other projects, eventually paying the suppliers when these growth efforts yield fruit. Ideally, this benefit would trickle down to the supplier in terms of stability and an increased likelihood of repeated orders.
When looking at advantages and disadvantages of delaying payments to suppliers, there’s also a clear downside. Even the smallest supplier will eventually tire of late payments, which means the bigger company might get cut off from their services. The business relationship suffers as a result.
Solutions for suppliers
Now that we’ve answered the question of why can large firms delay payments to their suppliers, it’s time to turn to solutions. In the face of rising late payments from large companies, what recourse do small suppliers have? There are the usual options, such as charging late fees and writing stricter terms and conditions into your contracts. It’s also beneficial to provide high quality goods and services, as this makes it more likely that the large companies will want to hold onto you as a supplier. This all decreases the incidence of unpaid invoices.
Many are turning to cryptocurrency as a regulatory solution as well. A public blockchain could mean that payments are negotiated and worked into contracts. If cryptocurrency payments are included as part of a blockchain contract, the large buyer wouldn’t be able to withhold their payments – it would go through automatically, as outlined in the contract. Ultimately, this technology may be beneficial to both buyer and supplier alike.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.