There’s a new trend in the industrial sphere, and some suppliers are likely not happy about it: Lately, when the supplier bill comes due for U.S. companies, they have been taking a rain check. In fact, according to a study from The Hackett Group, Inc., from 2016 to 2017 the 1,000 largest U.S. public companies delayed payment to their suppliers. Many analysts say this trend has been exacerbated by the recent recession and subsequent recovery.
“Companies are extending a lot of trust in the way that clients pay them — it is a loosening of discipline,” says Ludovic Subran, the chief economist at trade credit risk insurance provider Euler Hermes. This statement reflects the complicated nature of the supplier-manufacturer relationship in the B2B space, in which an unpaid bill doesn’t necessarily mean negligence.
On the procurers’ side, the logic of such practices is easy to follow: By delaying payments, companies can increase their cash on hand for use in other areas of the business, stimulating growth. Theoretically, such growth creates stability that extends to the suppliers themselves. However, in practice, these actions are much more complex, and are being viewed with growing concern on the world stage.
Suppliers See Longest Wait for Payments in Last Decade
As profiled in a recent Wall Street Journal article, companies like Stanley Black & Decker, Inc. and Hanesbrands Inc. have increased their payment delays to suppliers. In doing so, these companies increase their capital for other uses.
For example, Black & Decker’s delayed payments, among the highest in the United States, have freed up $500 million in capital since 2005. According to the company’s chief financial officer (CFO), this increase in capital created valuable opportunities, such as acquisitions that wouldn’t have been possible otherwise.
Companies are following suit across the United States. According to Atradius, a global credit insurer, 90% of suppliers are reporting late payments. From 2017 to 2018, average payment duration has increased from 61 to 63 days. David Huey, Atradius' president and regional director of U.S., Canada, and Mexico said, “It is interesting that in a healthy, growing economy, bad debt continues to plague B2B markets. To think that 51% of respondents have had a customer suffer bankruptcy or simply close their doors is eye-opening.”
Such results are significant, since pushing off payments shifts responsibility onto vendors and increases their risk. This is occurring at unprecedented rates. In fact, “The largest public enterprises took an average of 56.7 days to pay suppliers last year, the longest time frame in the last decade,” according to Hackett.
The Global Worsening of Late Supplier Payments
The United States is not alone in delaying supplier payments. A report in the Financial Times from May 3, 2018, says Euler Hermes found that payment delays have reached 66 days around the world, which is an increase of one-tenth since 2008. The United States, along with China, Spain, Portugal, and Greece, have been found to be the “most dramatic” actors.
In contrast to Black & Decker’s CFO, Subran and others find this trend to be worrisome. “The longer you wait, the more risk that your clients hit trouble. When there is a cyclical downturn, the companies with longer payment terms are those that get hit first.” He describes these companies as using their vendors as an “ ‘invisible bank’ for free financing.”
Noticing this risk, some officials, like the U.K.’s Small Business Commissioner Paul Uppal, are calling for fines to deter late payments. As commissioner, only being able to “name and shame” these companies is not enough, he argues. “Having the ability to fine focuses minds and brings to credibility to the role.” Despite these arguments, a recent survey found that 42% of small businesses doubt that the commissioner will be able to make a meaningful change.
Cryptocurrency to the Rescue?
With the rising tide of late payments and the lack of faith in public officials’ ability to curtail it, suppliers are put in a precarious position. Afraid to lose business with clients, and without effective regulation, many suppliers feel that they must accept late payments as the new normal.
However, new technologies may provide a solution to these issues. According to a new report from South Korea, blockchain technology could provide an answer where others have failed. The Korea Small Business Institute (KOSBI) found that the “security of blockchain combined with the speed of cryptocurrency is an ideal match for B2B payments.” According to research fellow Park Jae-sung, if a public blockchain were created and cryptocurrency payments were negotiated and included in contracts, “the large corporate buyer would not be able to withhold payment on an invoice even if it wanted to.”
There are several obstacles involved here, namely that blockchain and cryptocurrency would need to be widely adopted and implemented for effective use. Convincing both manufacturers and suppliers to agree to this technology, especially when companies may still be benefitting from an older system, will not be easy. However, Jae-sung believes that such growing pains are necessary for the technology to become a common practice — one that some believe will be the future of trade finance.
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