Russel Byrd on how to cope when your customers change their payment terms.

Suppliers to Carlsberg were recently angered by the beer giant’s decision to increase its payment terms to 95 days. Carlsberg is the latest well-known brand to adopt this strategy joining the likes of Amazon, DHL and Vodafone in a practice the Federation of Small Businesses (FSB) says is “crippling” small businesses in the UK.

The companies in question blame “unprecedented economic hardship” and defend this practice as a cost cutting measure designed to help them ride out the recession. But this is small comfort to the one in three small companies in the UK who are now waiting longer to be paid by debtors since the onset of the credit crunch, a problem that led directly to the closure of 4,000 firms last year.

So how can you manage this situation? Your profitability could look perfectly healthy but if the cash isn’t flowing you’ve got a serious liquidity problem. At Randall & Payne, our first piece of advice to clients facing this scenario is to plan ahead as soon as the issue arises.

Adapt your business plan to allow for changes in payment terms and examine your forecast to see how it’s likely to affect your overdraft. Don’t wait until you’re banging on your bank manager’s door asking for money - speak to your bank about credit when you foresee that debtors’ payment terms could become an issue not when they already have, your bank will be much more receptive at that stage.

If you’re not already doing so, you may want to consider invoice discounting i.e. factoring or confidential Invoice Discounting (CID) as a means of offsetting changes in trade terms.

With either scheme, a third party funder provides cash against your invoices as they are raised up to a pre-agreed limit (usually 80%-85% of the invoice amount). This can however be a costly option with monthly fees/interest charged on the amount borrowed.

You could also look at offsetting the problem by extending your own payment terms although this will simply move the problem down the chain, potentially damaging relations with suppliers you depend on.

Our advice would be to talk to your suppliers openly and honestly about your situation, remember that it’s in their interest for you to stay in business so you might be surprised at what they’re willing to negotiate.