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Paying small suppliers early – every little helps

After a recent announcement from Tesco, the slogan “Every Little Helps” seems to be as applicable to their small suppliers as it is to their customers.  Large retailers have faced public criticism that their payment policies leave small suppliers facing cash flow problems.  By forcing their own payment terms on to suppliers, small businesses were finding themselves not being paid for up to 60 days by the largest companies.

Tesco have now announced that its smallest suppliers, selling products worth £100,000 or less in a year, will receive payments within 14 days.  The current industry standard is 28 days, although some suppliers are still waiting up to 55 days for payments.

For those that find themselves at the bottom of the foodchain, it can be extremely difficult to manage cashflow.  The larger firms can dictate when the payments will be made, but for the smaller retailer they can not simply go back to their suppliers and ask for more time to pay.  In reality the smaller suppliers end up financing the larger companies, which does not seem to be fair.

Hopefully with large corporations like Tesco standing up and showing their commitment to helping small companies, others may follow their lead.  But what happens if they don’t, and what can be done?  The obvious answer would be to only trade with customers who are willing to meet your sales invoice terms.  This though is not always feasible, particularly when the chance of getting an ongoing contract with a multinational company is at stake.

Some companies will use factoring or invoice discounting to bridge the gap and to assist cashflow.  This would work well in these situations, although it does not come without its costs.  Other options such as overdrafts or bridging finance are available.  Directors also need to focus on the debt collection for the other invoices and ensure that these are being brought in on time, to assist with delays.

For any director, there needs to be a decision made, is the delay in getting paid worth it to get a big contract through the door, or will it be so detrimental to cashflow that the company cannot afford to trade?  This fundamental question needs to be answered before any contract is agreed.

Does this situation sound familiar?  Are you struggling to meet costs whilst debts are being collected?  Contact Portland's sister company Cashsolv to find out how our tailor made financial solutions could assist.

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