All businesses are under pressure right now to be creative, perform better, contract smarter and pull out a decent fiscal 2020. That pressure often starts at the top, with big businesses, and then rolls downhill onto small business. You know, like excrement.
Big business holds sway when negotiating terms.
Getty Images/iStockphoto – Tsezer
Frequently small businesses are asked by their clients for extended payment terms. Small businesses vying for the big contract or blue-chip account, typically accept any payment terms requested—60-days, 90-days, and, according to PYMNTS.com, even 180-days. Yikes!
The web is littered with announcements of large companies managing disruptions in staffing and supply, and they are extending payment terms to their suppliers. Supplier networks are in for a roller coaster ride with companies like: Carter’s, Kohl’s, Macy’s, Gap, Belk. And, this isn’t just a U.S. problem, this is a worldwide problem as sites, like the Workers Rights Consortium, have cropped up to report on (and shame) big corporations being dodgy with workers and suppliers.
It is understood that if you want the contract, you need to play the game. This expectation on the part of big business has created the conditions that sustain the alternative finance industry. Small businesses need access to capital in order to say, “Yes, pay me whenever it’s convenient, just buy more.”
In ordinary times, well-run, profitable small businesses are expected to accommodate these requests. Here’s the thing: these aren’t ordinary times, not all businesses are well-run, and even in good times most businesses go through unprofitable streaks that remove their flexibility.
In the coming months, as big businesses turn the taps back on and re-engage the small businesses they rely on, this issue is going to heat up.
Changes in terms, discounts and buying patterns may affect you like this:
- You pay your employees twice a month yet accept 90-day terms with your client. You’re doing a month’s worth of work before issuing the invoice and so you’ll have paid your employees 8 times before receiving the first payment from your client under these terms.
- A client asks you to extend a discount on your services. Small businesses are already struggling to keep contracts in place and stimulate customer activity, and if you agree you will now receive less for the already reduced amount of work you are doing.
- A business negotiates an early-payment discount on services, and regardless of whether they pay early, on-time or even late, they take the early-payment discount. It is usually time intensive, and appears petty, to try and recover these unpaid amounts so your business is expected to suck it up.
- A big business requires that expenses you pass-through (for example media) be billed with no mark-up. Then in a stroke of financial creativity, they increase the amount of pass throughs they push through your business while further negotiating for extended payment terms. Why not, there is no disincentive to having others carry costs on extended terms.
Don’t nickle and dime me man
The irony of the situation, is that when small businesses propose work, at least in the services or consulting business, people always question why this item costs X and that one costs Y. Often big businesses work to whittle down a proposal because they perceive or proclaim outright that they are being “nickled and dimed.”
In actuality, it is the big business that is chipping away the nickles and dimes for your privilege of doing business with them. And that small change to the big business, can add up to serious dollars for companies that have large contracts with a few extremely shrewd corporate buyers.
Although the article is a little dated, Paul Ericksen, wrote a great piece in IndustryWeek with an apropos title: ‘Extended Payment Terms’ Is Just Another Term For Pilfering.’ In it, he looks at the levers of influence Tier 1 and Tier 2 suppliers may have to find a healthier give and take with their Corporate overlords. But leverage is something few feel they have right now, and it will be some time before the ground feels solid again.
It takes money to make money
The standard costs of doing business may be inevitable, but they are not cheap. Big businesses expect their suppliers to accept the terms they offer. Small businesses breeze past the legalize and unfortunately end up worrying later about these theoretical terms and discounts when they are living their cash flow.
If current events have taught us anything, we are all interconnected in this economy. Big and small businesses alike rely on each other to keep operating, delivering, servicing, feeding, securing, etc. Business owners, sales associates, account managers, and procurement people need to be prepared to have more candid conversations about the real costs of doing business right now.
It doesn’t matter how the contracts have been structured the last ten years. It doesn’t matter that all other key suppliers have agreed to the new terms. It is incumbent upon you to ensure you can work with the terms and maintain a stable business.
And finally, to all my Fortune 500 customers, this article is not at all about you. Pay me whenever it’s convenient, just buy more.