Are you becoming your customers' unofficial lender?

Ashley Smith looks at the current climate and the importance of good credit management.
‘Corporate responsibility’ is currently high on board room agendas as the press follows the global recession, so now is an ideal time for companies to consider their payment terms and the resultant effect of their policies on their supply chain.
We have recently seen Argos, Dell and Unilever announce increases in payment terms to their suppliers to 90 days yet these same companies apply very different terms to their own customers. Non-account Argos customers are expected to pay at the time of order whilst trade customers are extended 28 days credit. Unilever has issued a statement attempting to justify their decision: “By working with suppliers to release cash, we provide funds for Unilever to invest in further growth, which is in the long-term interests of us and our suppliers.”
But consider the reality of this statement, it’s far cheaper to obtain funding from suppliers than it is from banks and Purchasers more often than not can ignore suppliers terms whilst they can’t ignore their banks covenants.
If a large Company breaches its covenants with its bank or fails to make a payment or bounces a cheque, the bank will charge up to £25 per letter and in extreme cases can call in its loans to the Company. For the bank this is easy, it simply deducts charges and interest from the Companies account at the time of issue.
In the alternative if a supplier to the same Company provides finance through Trade Credit and the purchasing Company breaches its payment terms - and the supplier complains and raises Statutory Late Payment charges plus interest - the purchaser can simply switch suppliers at no cost. If the Supplier is however able to issue charges and interest he may still have to incur additional costs in collection and litigation as many Large Companies may simply refuse to pay the Late Payment Charges.
The 2000/35/EC’19 Directive should prohibit the abuse of freedom of contract to the disadvantage of the creditor. When an agreement mainly serves the purpose of procuring the debtor additional liquidity at the expense of the creditor, or where the main contractor imposes on his suppliers and subcontractors terms of payment which are not justified on the grounds of the terms available, these may be considered to be factors constituting such abuse.
The Directive proposes to address this issue by a) tightening the rules on grossly unfair contracts and b) allowing SME’s to charge for full recovery costs.
On the other side of the coin, McDonald's is an example of a company using the latest technology to ensure that its supply chain is kept fully up to date with the progress of an invoice through its systems by using an Online Accounting System to which all suppliers have access. A supplier can check that an invoice is logged, check the payment date and review any comments made by McDonald’s staff during the payment process. This enables queries to be dealt with within the payment terms and  gives the supplier the safe knowledge that McDonald’s will make payments in accordance with the agreed credit terms.
We often read in the press that it is the bankers who are to blame for the slowness of SME’s pulling out of the recession due to their lack of willingness to lend to SME’s but it’s my strong believe that we are looking in the wrong direction. It’s not additional bank lending that SME’s need to pull out of a recession, it’s reduced payment periods to give SME’s resources to invest in new jobs, technology or develop new products etc.
As demonstrated by Unilever, good ‘corporate governance’ does not extend to its supply chain and if the EEC is serious about supporting SME’s through improved cash flow by shortening credit terms, then they must give SME’s the assistance through legislation. I suggest that the EEC should adopt a much tougher stance towards medium and large companies making individuals - and specifically finance directors - personally responsible through a series of fines coupled with a ‘name and shame’ scheme. Until this approach is taken, I believe growth and job creating within the SME sector will continue to be hindered.
Ashley Smith MICM, MAAT
For more information visit: www.payontime.co.uk