SupplierPay Initiative in the USA

In July 2014, U.S. President Obama launched the SupplierPay Initiative in the USA. In a nutshell, the objective of the program is to have large companies pay their suppliers faster than the usual 30-90 day payment terms. This would free up supplier working capital and thereby enable these small and medium enterprises to reinvest this capital boosting the economy and job growth. Small businesses create about 60 percent of net new American jobs and therefore play a large role in stimulating job growth.

In the initial rollout of the program, 26 companies signed up and in November 2014 another 21 joined them. Companies ranging from Apple to Zappos, across all sectors of the economy, are reducing the time to payment for their smaller suppliers or providing financing solutions that enable such suppliers to access working capital at lower cost. Intuit, one of the companies in the initiative, has offered 10 day payment terms to over 300 of its suppliers impacting over $40 Million in payments. Lockheed Martin is cutting its payment terms in half from 30 to 15 days. This is good news for small suppliers since, according to Bloomberg, the median payment delay was 46.5 days for S&P500 companies in 2013.

The U.S. Commerce Department released a report in November 2014 stating that the larger companies participating in the program can also realize significant economic benefits such as improved quality, a more stable supplier base, and lower prices.

In the United Kingdom, from April 2016, large companies will be required to publish their payment practices twice a year disclosing:
– payment terms
– average time taken to pay
– proportion of invoices paid beyond agreed terms
– proportion of invoices paid in 30 days or less, between 31 to 60 days, and in more than 60 days
any late payment interest owed and paid

Large firms will have to publish the information to a central digital location such as an online portal, which will be made publically available by the government. Business Minister Matthew Hancock said “We are determined to make Britain a place where late payment is unacceptable and 30-day terms are the norm – with a clear 60-day maximum.”

If you are a large company and would like to build supplier relationships and a stable supply base this is a good opportunity to get ahead of your competition by speeding up your payments to small suppliers.

You could just follow the lead of the companies in SupplierPay and set faster payment terms for your suppliers. In general, this would mean that your company takes on additional debt or taps into cash in order to make this happen. For some companies, such as Apple, with huge cash reserves, using cash to pay suppliers faster is a great way to build supplier relationships! For other less fortunate companies without a pool of idle cash, taking on additional debt to reduce payables is not appetizing.

One option is to find an intermediary financial institution that is willing to lend on the basis of the buyer’s receipt of goods at a more favorable rate than currently obtained by the supplier. Interestingly, banks in the Asia-Pacific region are beginning to realize that this process has hidden benefits for them since they can build relationships with and obtain larger shares of the buyer and the suppliers’ banking business.

Another option is to build up a full fledged supply chain finance program including supplier benefits such as cash flow improvement and transparency, shared cost reductions in material and transportation purchases, working capital optimization in the system etc. For example, Siemens has setup a program with some of these elements and now has over 1300 of its North American suppliers participating in it.

If you improve cash flow for your small suppliers, you could earn the indirect reward of a more stable and loyal supplier base and be rated high on the “ease of doing business with” scale!