Extended payment terms are bad for business. Here’s how to break the cycle. 

Why Delaying Supplier Payments Harms Economic Recovery

Suppliers dealing with delayed payment schedules from cash-conservative customers might be reminded of the iconic line from Gordon Gekko: “It’s nothing personal; it’s just business.”

That may be true, but treating suppliers like a cheap line of credit is also bad for business. As Tradeshift’s Index of Global Trade Health shows signs of an upturn in trade activity in 2024, lengthy payment cycles could kill off the green shoots of recovery before they have had the chance to take root. 

Mattias Nordlof, Director of Embedded Finance Products at Tradeshift, explains why finding a middle ground that suits buyers and suppliers is the only logical solution to this age-old problem.

 30-Day Payment Terms: A Relic of the Past

Cast your mind back for a moment to the days before computers, when purchase orders were written and circulated in mail drops, paper invoices came through “snail mail”, and cheques had to be hand-signed and sent out in an envelope. Getting all of this done in 30 days was pretty swift back then. 

Things have moved on, but payment terms of 30 days and more remain a staple of B2B trade relationships. Extending payment terms and delaying supplier payments have also become strategies organizations will often deploy as a protection measure during challenging or uncertain times. 

Suppliers, especially the smaller ones, find themselves last on the long list of buyers’ payment priorities. Most of them will get paid; eventually. In the meantime, they must find ways to bridge the gap through expensive financing, further strained by high interest rates.

They’re the lucky ones. For most businesses, securing a line of credit from the bank simply isn’t an option. In the US, recent data suggests the approval rate on loans to small businesses has sunk as low as 13 percent.

Suppliers are facing an ever longer wait to get paid.

Payment terms have climbed significantly since the 2008 financial crisis, with terms of 60, 90, and 120+ days being by no means unusual. Late payments that breach negotiated payment terms are also common. A UK study found around 60% of invoices are paid late, with small businesses waiting an average of 14 days beyond agreed terms.

Such behaviour might well be considered fiscal prudence on the part of large organisations looking to preserve their financial stability. However, this fails to consider the pressure lengthy payment cycles put on supply chains, or the reputational damage when a supplier acquires the label of an unreliable payer. Delayed payments often result in price hikes on future invoices, negating short-term savings.

Large buyers accustomed to being able to squeeze suppliers without fear of consequence got a wake-up call during the pandemic when they realised just how reliant they were on their supply chains. As the economy gears up for a recovery, they would do well to remember that starving suppliers of cash isn’t just hurting suppliers; it’s hurting everyone. 

 Cash Flow: The Fuel for Supply Chains

Supply chains are like engines, and cash is the fuel. Reliable and predictable cash flow keeps the engine running smoothly. Delayed payments disrupt this flow, causing the engine to splutter or even stop altogether.

For the past two years, businesses have had their foot on the brake pedal because of rising costs and weakened demand. A lack of new orders has left suppliers running low on fuel. Many will have been forced to run down cash reserves to keep ticking over. Some may have had to lay off staff to make ends meet. 

As demand starts to recover, large buyers are asking the same suppliers to hit the accelerator pedal to fulfill an influx of new orders. Only the fuel isn’t flowing fast enough to do this. Data from Tradeshift’s Q1 Index of Global Trade Health shows the average time to pay an invoice remains 6% higher than the pre-pandemic average. This may seem insignificant, but the average supplier only has enough cash to stay in business for 27 days. Even slight delays can knock carefully balanced cash flow off its axis, hindering a supplier’s ability to hire staff or fulfill orders on time, slowing economic recovery.

The Role of Technology in Payment Solutions

There’s no easy answer to all this. It’s going to take much creativity and hard work to improve the way buyers manage their capital. What’s certain, however, is that technology can play a significant role in addressing some of these challenges. 

We’ve said a lot about how organisations often see delaying payments as a proactive strategy to protect their cash flow. Antiquated processes are also a critical factor in delaying the time businesses take to pay their suppliers. 

According to Ardent Partners’ 2024 AP Metrics that Matter report, around 50% of all invoices are still received on paper, and a large chunk of the rest land in inboxes as static PDFs. This creates a vast amount of manual work that slows business down. 

Paystream Advisors estimates it takes an average of 16.3 days to process an invoice manually. In contrast, e-invoicing and AP automation solutions like Tradeshift Pay can reduce processing time to around two days. Suppliers can also track the entire process in real time, gaining a clear view of payment timelines.

Digital networks like Tradeshift, connecting over a million businesses, enable embedded finance services that offer faster payment options, regardless of customers’ payment policies. For example, our joint venture with HSBC is designed to allow suppliers to access payments on invoices in two days or less. And in most cases, they won’t even have to wait for their customer to approve the invoice. 

Balancing Payment Terms and Financial Health

Some argue that embedded finance wouldn’t be necessary if buyers paid their suppliers quicker and on time. There’s a kernel of truth in that. It’s also true, however, that international trade relies heavily on payment terms that account for shipping and quality checks. And while there are certainly bad actors out there, most buyers don’t actively seek to pay their suppliers late. Enforcing payment through overly restrictive regulation doesn’t address the problem; instead, it shifts cash flow pressure from one end of the supply chain to the other. 

The beauty of a solution like embedded finance is that it alleviates the pressure on both sides of the transaction, enabling the engine to run smoothly through bad and good times. 

Learn more about how Tradeshift can help your business thrive now and in the future.