Providing better payment terms to small businesses may reduce your supplier chain risk.
Paying suppliers slowly as a way to conserve cash is a common practice among corporations of all sizes. However, it may be hurting your smaller suppliers and increasing your supply chain risk.
Many small businesses do not have sufficient cash on hand to withstand a major impact. According to a recent Bloomberg article, most firms are operating month to month with cash reserves only lasting an average of 27 days. One of the contributing forces behind the lack of cash reserves is the extended payment terms frequently required by corporations. Long payment terms can increase supply chain risk in the event of an economic slowdown or supplier setback.
One way to reduce this risk is to provide smaller suppliers shorter payment options. Many governments are recognizing the cash flow needs of small businesses and, in an effort to aid them, are instituting policies to pay suppliers early while also encouraging large corporations to do the same. The US government has implemented the Prompt Payment Act to help accelerate payments to small government contractors and subcontractors. The Act mandates that contractors are paid within 15 days of invoicing without requiring an early payment discount. In addition, the US has rolled out the SupplierPay initiative where private companies have agreed to shorten payment periods with small suppliers. The United Kingdom and the Netherlands have also instituted similar initiatives (more information available here and here).
Some Supplier Diversity departments are also leading the charge in this area by offering better payment options to small suppliers that need them (see an example of such a program at the Vanderbilt University). With their direct interaction with small and diverse suppliers, these departments are more aware of suppliers that may need such assistance and in a better position to recommend special considerations for these suppliers within their departments.
>For small businesses, long payment terms are a double edged sword. While large corporations have the purchasing power to demand extended terms, small suppliers are unable to do the same with their own supply base. They have to pay their suppliers early, and receive payments late. This further increases their working capital requirements.
Does your supplier diversity program offer short payment terms for your small and diverse suppliers? If not, it’s worth considering implementing such a program. It helps your suppliers, and also lowers your company’s risk of having to replace a supplier that failed because of insufficient working capital.