Owing to History

Setting payment terms goes way back. The Code of Hammurabi codified promissory notes, early Romans engaged in invoice factoring, 9th-century Chinese merchants traded something called flying cash, and European merchants in the Middle Ages expanded domestic and international trade with letters of credit.

Finance is more advanced now. Cash is transferred electronically, companies move it much more efficiently, and letters of credit are often digital. Payment terms stabilize some trade, but they are mainly used to help corporations respond to the pressures that shareholders and investors place on them.

The argument for encouraging corporations to extend payment terms is strong. Delaying payment by one month generates free cash flow equal to one month of buying costs. If a corporation spends a billion dollars a year buying the things it needs, every month of delayed payment to vendors generates $83 million in interest-free loans.

Imagine you’re the CFO of a Fortune 500 retailer and standard payment terms for your vendors are four months. If procurement orders 300 surfboards in February from the surfboard maker who then ships them in March, you won't pay for them until July, and you'll probably sell them all by May. Or send back the ones you don't. That's a good deal.

But imagine you’re the surfboard maker. You accepted the order for 300 surfboards and hope to ship it in March, but that will be tough without much revenue coming in until July. For all of March, April, May, and June, you'll need to find enough cash, debt, or credit to fill this new big order and keep paying your employees every two weeks. You may even need to hire one or two more part-time people to have a chance of filling this new order in the first place.

Bridging multi-month gaps is a challenge for any small or medium-sized business. Was your invoice approved December 15? Expect payment mid-April. August 25? Christmas. And those dates assume your customers are paying you on time. Managing these gaps takes up a lot of time and energy.

Examples: You don't have enough cash on hand, so you apply for several bank loans but keep getting denied. You try to apply to your customer's supply chain finance program, but the onboarding paperwork is super-complex, and the program seems aimed at larger companies with less cash volatility. You try finding an invoice factor or merchant cash advance but don't know where to begin.

Whatever the solution is, as long as your customers are the ones deciding payment terms, you have to find a way to keep the lights on while going long periods without being paid.

Unpaid to Wait

As mentioned earlier, corporate treasurers and procurement officers are beholden to shareholders and customers, not vendors. Longer payment terms boost the metrics shareholders care about. Although finance and purchasing teams may sympathize with vendors, they impose long payment terms because that's part of their job.

So millions of small and medium-sized businesses end up waiting longer and longer to be paid. When a public company announces it's "optimizing working capital" by extending its payment terms, their stock price often rises. That’s the normalization of long payment terms and an indication that they are likely to protract over time vs. shrink.

You can see it in the media. Here's an excerpt from an open letter written by Todd Schlekeway, the President & CEO of NATE, published two weeks ago and emphasizing that payment terms in his industry continue to lengthen:

What was once a standard 30-day payment window has now ballooned to 60, 90 days, or longer. These delays are compounded by increasingly complex closeout requirements and additional troubleshooting responsibilities added to contractors’ workloads without corresponding adjustments in compensation. Contractors are left covering payroll and overhead costs for months before receiving payment, placing significant financial strain on small businesses – the majority of which are America’s contractors that build and maintain the country’s telecommunications networks.

And a Reuters piece last week highlighted how the general trend is toward less commercial bank lending, despite demand (hat tip to Marshall Lebovits):

...demand for commercial and industrial loans from large and medium-sized businesses rose to 9.4% in the fourth quarter of 2024, and from small firms to 3.4%. At the same time, banks also tightened standards for those types of loans...

Also last week, cfo.com noted the increased appetite on the buy side for more term extensions:

......recent [American Productivity & Quality Center] research shows that more organizations are delaying payments to vendors and seeking longer payment terms to maintain higher levels of cash on hand.

And finally, there's this older video segment from The Wall Street Journal's MoneyBeat published in 2013. Paul Ziobro discusses Procter & Gamble's vendor payment tactics as if they were noteworthy, and they probably were at the time, but today this doesn't really seem like news:

They want to extend the time that they will pay their bills, basically, to suppliers...suppliers have to wait to get their money...what this basically does is free up cash for P&G.

Kapwork’s mission is to help small and medium-sized businesses shrug off the trend of longer payment terms by quickly and reliably turning their unpaid invoices into cash. Kapwork Verify gives you Portal Agents that automatically verify the data that funders need to purchase your invoices efficiently and at a reasonable rate.

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