It’s unlikely that your business has made it through the last twelve months without at least one big fight over payment terms. And despite government statements, lobby groups and plain common sense, it’s likely that in the next twelve months, you’ll go through several more.
The justification may be “industry norms”, but the benefit is a transfer of risk, a short-lived boost to margin and a healthier balance sheet for the winning party. But the relationship itself, and ultimately the whole supply chain, almost always becomes less efficient as a result.
Why? Because the change in terms almost always moves cash from the smaller party to the larger. A move from 60 to 90 days takes 10% of annual turnover straight from one bank account to the other. The larger party uses it to pay down debt, the smaller has to take more debt on.
However, the interest and insurance charge for the smaller business on that debt is far larger than for the bigger one. The deal simply moves debt to the weakest and most expensive place in the supply chain, damaging investment, innovation and stability. Cash flows out of the supply chain to banks and insurers and the deal destroys value.
This is the antithesis of a “good deal”. A good deal trades what is cheap for me and valuable to you, for things that are cheap for you and valuable to me. There is a net benefit from the trade. The negotiation is about who gets to keep most of that benefit.
So what should good negotiators do on payment terms?
- Find the value: where is the best place for the debt to sit
- Trade the benefit: how could the benefits, created by that shift in debt, be used to balance risk and drive new growth
- Be proactive: talk about the options and benefits long before you need to – don’t wait for the negotiation to come to you
BOTTOM LINE: Small and medium sized enterprises are the engine of growth for the economy, the source of almost all radical innovations and they can offer unique advantages to their larger customers. Large powerful businesses that push debt to SMEs may get a short-term win, but long-term, simply create an inefficient, disadvantaged supply chain. Neither big business, nor SMEs, can afford to let that happen.