I hope that you have enjoyed the article “Revisiting Vendor Payment Terms: It’s Time!“
I was inspired to write this article because I see a lot of procurement departments unilaterally changing their payment terms with their vendors. Some are doing this because they need to hold onto their cash longer or else they will become victims of the recession and become insolvent.
However, other procurement departments are doing it because 60- or 90-day terms have become “the new normal.” Net 30 is so 2007 to them. And if everyone else is beating up their vendors, they don’t want to look like the laggards who still have net 30 terms.
As expressed in the article, extending payment terms without the desperate need to do so when many vendors are struggling financially can result in some self-inflicted wounds on your own organization. If you absolutely have to extend payment terms to survive, then do so. But be aware of how this impacts your vendors. Though many talk about the economy improving, the credit crisis is far from over. Consider these excerpts from an article entitled “What To Do When The Bank Pulls Your Line of Credit” in this month’s issue of Entrepreneur Magazine:
- “Banks…want to support local business but know that state and federal regulators will come in to evaluate their loan portfolios. In the name of making banks better, they are being forced to turn down loans because of collateral or credit scores they would have accepted previously.”
- “Many economists predict little easing of business credit until sometime in 2011.”
- And in a case study, the magazine points out the plight of a small business owner who used to depend on a line of credit when customers didn’t pay on time. That line of credit has since been pulled: “Like many small business owners, [Ryan Weber, owner of Radiant Photography] depends on timely payments from clients to pay his own bills. But in this economy, invoices are stretching to 60 days or longer. ‘My wife and I are paying the mortgage on our home and making payments on one car,’ Weber says, ‘and we have a 6-month-old daughter. Some months, I received $5,000 from a single commercial client; other months I’m lucky to get two checks from magazines for $400 each. It’s very stressful trying to meet our monthly costs with no backup funding.’”
So, if you’re thinking about extending your payment terms, I hope that you consider the effect doing so will have on your vendors. And, I hope that you also consider negotiating discounts for early payment as an alternative to extending payment terms.
In this economy, many vendors are glad to give you a discount if you will just get them their money quickly!
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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