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Companies Using Payment Terms Extension to Optimize Cash Flow

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by Beroe Inc
14 November 2021

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Businesses in many industries like Retail, Pharmaceutical, Automotive, CPG, Aerospace, and Food & Beverage now use an initial tool to extend multi-level negotiation with suppliers for payment term extension to get average 90-day payment terms. However, in most cases, it depends on the country’s local regulations or mutual payment terms agreement. There are other mechanisms like ePayables/Virtual card solution, Dynamic Discounting Model, and Supply Chain Finance (SCF) Model that the companies can use independently. But using in collaboration can ensure maximum benefits concerning extended payment terms and cash flows requirements.

‘’We firmly believe that payment terms extension can lead to accretion of working capital that in turn helps to reduce the need for the corporate loan and, on the other hand, add cash stability at the time of expense flow. Extended supplier payment terms can showcase endurance and supplier trust’’, said Sujeet Kumar R, Senior Research Analyst at Beroe. “When the company uses extended payment terms, they become capable of managing cash flows swiftly. Today top companies are exploring various mechanisms to extend payment terms and optimize working capital, such as multi-level negotiation with the suppliers“.

60 to 65 percent of the Fortune 500 organizations have included mechanisms like ePayables and Supply Chain Finance (SCF) to make payments with long and short-tail suppliers. So, companies that aim for early payments, rebates, and discounts use the ePayables model, while companies focusing on early payment discounts use dynamic discounting. An organization whose sole aim is to extend supplier payment terms employs a supply chain finance model. 

From a broader perspective, payment terms get affected by country-specific laws followed by the size/coverage of the suppliers, non-critical categories/suppliers, spend size of the customers, etc. Countries like France and Germany have specific laws in place to protect the interest of the suppliers, thus making payment terms extension difficult. On similar lines, global suppliers follow uniform payment terms across geographies, and local suppliers have short payment terms as delays in payment can influence their cash flow and liquidity. 

A significant part of the global firms have instalment days as high as 60/90 days. They embrace the supply anchor finance procedure to have expanded instalment terms with providers limited by guidelines. They take on a Dynamic Discounting strategy to get an early instalment rebate. Providers are fine in making receipt instalments in 10-15 days and give 2 percent to 2.5 percent rebate upon purchaser organization. 

Virtual card instalments permit purchasers to make opportune instalments and exploit early instalment limits, cost investment funds, income age, and security highlights. Dynamic discounting depicts an assortment of strategies where instalment terms can be set up between a purchaser and provider to speed up instalment for labor and products as a trade-off at a decreased cost or markdown. SCF Model is a modern technique employed by top organizations owing to its constructive outcome. In this model, the purchaser association teams up with Banks. It utilizes its SCF apparatus to subsidize the providers who assist the organizations in expanding the instalment terms to 120 days.

“With the help of models like multi-level negotiation with suppliers on payment terms extension, companies can ensure better capital optimization. Yes, there are restrictions but effective implementation can unlock excellent growth opportunities and we already see this in countless case studies” said Sujeet Kumar R, Senior Research Analyst at Beroe. “Developed countries like the U.S. have emerged as a most advanced and matured market for supply chain financing tool that is used as a healer to meet internal obligations of liquidity constraints”. 


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