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Customers Use Credit Departments as a Lender in Tight Economy

Kendall Payton, editorial associate for NACM

At the end of each year, many businesses try to make their cash stretch as far as possible by holding what they consider to be non-essential payments. Some customers will intentionally make late payments so they can report a stronger cash position at the end of each quarter or year, and credit departments are typically paid last during tight economic conditions.

But this trend is nothing new. According to a recent eNews poll, 87% of credit professionals notice their customers conserving cash toward the end of each year. “In my experience, beginning mid-November, I have had companies either just stop payments all together with no notice, or send a communication to the accounts receivable department that all payments have been suspended until the first business week of the new year,” explained Val Venable, CCE, ICCE, instructor of the FCIB International Credit & Risk Management course. “Simultaneously, they may notify their vendors that they are stopping incoming shipments of non-essential goods, to avoid tax liability on inventory at year end.”

Today’s volatile economy, driven by high interest rates, inflation and ongoing supply challenges, could exacerbate the amount of cash customers withhold—and how early they start doing so. “Companies may be forced to make a decision as to which bills to pay,” Venable added. “Many vendors are not successful in collecting interest or late fees on payments made after the due date, so it is almost like an interest free loan while cash is diverted to more pressing demands, such as taxes, interest payments and payments that carry a significant penalty if not paid on time.”

Even if interest rates are built into your terms and conditions, collecting can be difficult, said Lisa Rhine, credit manager at Bull Moose Tube Company, Inc. (Chesterfield, MO). “I’m trying to enforce some of our terms and conditions, which stipulate that we can charge interest. Very rarely have I done that, but I might need to with some of these that are really dragging out. Whether I collect it or not, I don’t know, but it might prompt them to pay faster.”

Rhine is seeing more of a payment slowdown than in past years, especially from her customers who sell to larger companies. “What I’m seeing lately, in the last two or three months, is a significant slowdown in payments from the steel fabricators business,” she explained. “I’m seeing a bigger slowdown than normal and less of a response to my calls. The ones that I am having problems with are selling to the big corporations, like your Fords of the world, because they can pay whenever they want.”

Customers also may be hoarding more cash to prepare for a recession, which some economists forecast to hit as early as Q1 of 2023. “I don’t think it’s out of the ordinary that in a recession, you’re sitting on cash a lot more to hedge a downturn in the economy,” said Brandon Nickoli, senior credit analyst at Cenovus Energy (Dublin, OH).

Nickoli sees more customers asking for payment extensions because they are not receiving cash from their own customers.

He added, “as much as I would like to help those customers out, we are not a bank and we can’t offer an interest-free loan even if it’s just for a few days.”

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