Suppliers have begun taking action to shorten payment terms with buyers in order to ensure insolvency does not leave them with unpaid debts, according to experts.
Warnings have been sounded for procurement teams after Bed, Bath and Beyond, which is reported to be close to bankruptcy, said accelerated payments to suppliers had contributed to losses.
Meanwhile, changes to UK insolvency law have produced an “incentive” for suppliers to seek earlier payment.
Nigel Boobier, partner at law firm Osborne Clarke LLP, told Supply Management: “[Suppliers tightening payment terms] can be really fundamental to a business, because it will materially distort their working capital management.”
He explained the best way to avoid this issue with suppliers was to ensure due diligence processes were up to date. “Understanding the client [is important], because if you push payment dates too hard it can be quite harmful to you. It’s a very difficult balance. You can end up not only owing a lot of money, but also losing a source of supply.”
For buyers in the automotive sector this risk was even greater. “If you’re sourcing something that’s quite unique, and there isn’t an alternative supplier, you won’t have any leverage. In the automotive sector, the parts can be very complex.”
Procurement’s focus on cost savings over resilience has helped compound the risk of insolvencies, according to the Office for National Statistics.
Boobier advised reviewing contracts to ensure pricing clauses included terms on termination and ensuring procurement teams talked to other parts of the business, including credit control and legal.
John Warchus, partner at Moore Barlow LLP, told SM the 2020 Corporate Governance Insolvency Act had made it easier for companies to survive hardship because it prevents suppliers from terminating contracts or demanding payment after the formal insolvency process had begun.
However, he added: “The problem is the supplier can still terminate before the procedure starts. And in reality that means the supplier needs to be even more on the ball than usual as to whether key clients are paying on time.
“If there's the slightest risk, or any suspicion the buyer can't pay some of those debts, there is now more of an incentive to terminate before the insolvency procedure starts, or at least threaten to terminate, to turn the screws.”
Warchus said to prevent this situation from arising buyers should pay off suppliers promptly and maintain a constant line of communication about financial status.
“Maybe you're just allaying fears,” he explained. “But it will be those end clients who don't pay up on time and don't respond to chases that are the real ones suppliers need to worry about.”
Bed, Bath and Beyond posted a downturn in financial results, which president and CEO Sue Gove stated was partly due to “an acceleration in vendor payment terms and credit line constraints”.
The company’s earnings before tax for the three months leading up to November 2022 was a loss of $225m, compared to profits of $40.64m for the same period in 2021.
A spokesperson for Bed, Bath, and Beyond told SM: “We continue to manage our financial position in a changing landscape and work with expert advisors as we consider all paths and strategic alternatives to accomplish our short and long-term goals. Our unwavering engagement with our supplier community will continue as we work together to realise our full potential.”
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