Managing Extended Payment Terms

Managing Extended Payment Terms

Small business owners have a lot on their plate. From hiring, to sales, to day-to-day operations, the life of a business owner is one marred with a seemingly never-ending to-do list. One of the hardest items to manage is capital.


Over the last few years, an unfortunate trend has been affecting millions of small businesses across the United States. The issue of “Extended Payment Terms", which refers to customers deferring payments to their suppliers in order to better manage short-term cash flow, is a problem far too many suppliers and vendors have been seeing firsthand.

Multinationals and large businesses often delay their payments to intermediaries down their supply chain for materials or services provided to them. The reason for this? Conventional wisdom would say that large enterprises have a market power advantage allowing them to forcefully dictate their relationships with smaller entities. If a small business does not agree or cannot produce what is promised, the large enterprise can just find another supplier from a long list of suitors, and leave their previous partner struggling to secure other contracts.

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For a Chief Financial Officer (CFO) at a large enterprise, extending payments to 90 or 120 days (or more) can help their cash management strategy by freeing up capital. This added capital contributes to their cash flow and allows them to fund expansions or undergo financial restructuring.

Obviously, this places the small business (2nd or 3rd tier) suppliers and vendors in a difficult position. On one hand, they have a secure sale that will eventually get paid, but on the other hand, they need cash to, not only pay their expenses but also to grow.

Every business has budgets and cash flow plans that depend on a wide variety of factors, including being paid on time. The impact of extended payment terms can quickly snowball into a big issue. Small businesses often don’t have rainy day funds or large cash reserves. Something so simple as not being paid for goods or services provided can quickly cause payroll issues, impact their ability to accept new business, and ultimately hinder them from growing and managing their business at the pace that they desire.

For years, an option many of these small businesses have had is “factoring” their receivables. This process usually works by a business selling its accounts receivables or invoices to a third-party lender at a discount. In some cases, this makes sense. For example, if your business needs to cover financial obligations and operational costs for 30 or 60 days. If you need to finance working capital constraints for anything more than a few months you might want to think about a line of credit.

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Typically, lines of credit are secured against accounts receivables, inventory or machinery and equipment. This collateral mitigates the risk for the lender. If you are a manufacturer, supplier or vendor in aerospace, automotive, consumer products, transportation or waste management, to name a few, then your inventory or equipment can be used to grow your working capital. Having a line of credit, especially with a lender that only charges on the amount withdrawn, can alleviate liquidity problems due to customers pushing payments to 120 days or more.

Extended payment terms mark a trend many businesses are moving towards, and it’s important to support small business owners across the country and bring the impact of such decisions to light.