NACM Oregon
November/December 2013
Business Credit Journal
Page 1
Customer Payment—Term-Pushback Strategy (Formal and One Offs): How Customers (Solvent and Otherwise) Are Unilaterally Extending Credit Terms and the Credit Team’s Response—Part I
In This Issue
by Scott Blakeley, Esq.
Customer Payment— Term Pushback ..........1
Abstract The credit team’s assessment of a customer’s ability to pay on terms often involves evaluating a number of factors, including a complex scoring model and calling on various sources of financial, bank and trade data, along with internet searches. Notwithstanding the involved credit evaluation the credit team employs to get the tightest bead on customer credit risk, since 2008 vendors have found many customers ignoring a vendor’s credit terms and unilaterally extending these terms. The terms pushback strategy (TPS) may be classified into two baskets: the formal terms pushback program, the Customer PaymentTerm-Pushback Program (CPTPP), is rolled out to all of the customer’s vendors, while the ad hoc or informal terms pushback program singles out certain vendors. TPS presents customers a less-expensive financing option, while improving their working capital. Both strategies are being adopted by the solvent and financially struggling customers, alike. It is the credit team’s objective to determine the customer’s motivation. With both the formal and ad hoc TPS, the credit team’s threshold evaluation is: (1) Will we get paid? If so, can we afford the increased costs that come with delay?;
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The Supply Chain and Trade Credit
and (2) If we may not get paid, what strategy can we adopt to reduce the risk of loss? The “new normal” facing the credit team seems to be the customer attempting to dictate credit terms to suit their working capital needs or cash flow constraints (think 45-75 days). This article considers the reasons for the uptick in TPS, examines the impact on vendors, and offers thoughts on how the credit team may deal with the pushback strategy.
Business Credit as Driver of the Economy The importance of business credit in supplementing companies’ working capital cannot be overstated. Absent trade credit, customers face a cash flow drain as they are forced to pay vendors for their goods and services in advance of the customer’s sale of the finished product or service to the end user. To ease the cash constraints that come with cash-in-advance and cash-on-delivery purchases, the customer may qualify for bank financing, but with interest and fees. Further, the bank’s financing is conditioned on the customer pledging all of their assets, and future assets, as well as the principal personally
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