I remember in a corporate finance class in college, we did a lot of calculations comparing prepayment to net 30, net 90 terms, etc.

The game is to maximize cash flow, though in the end, it doesn't make a lot of difference except in very thin margin businesses. But the general wisdom is to always try to take maximum advantage.

I always felt that it is a silly strategy considering that it strains your suppliers, provides little financial benefit, and big corporations blow so much money on so many other things that could easily be addressed before worrying about setting up net 30 payments.

It’s basically a free short term loan from your suppliers who are eating the inflation instead of you. It does strain your suppliers but if your business doesn’t really need them and you can force them to accept it, why not?

As a supplier, payment delay is basically a cost you have to bear to deal with large distributors. It’s a trade off between somewhat predictable volumes and cash flow availability.

I would never do a one off with a large distributor however. You are going to get swindled as this article nicely illustrates. Large distributors buyers have years of training exploiting people in your situation.

> It’s basically a free short term loan from your suppliers...

Honest question: Is this really a free loan, or is it the cost of the load hidden (i.e. the interest charges are not broken out explicitly)?

For example, if a supplier has shipped goods with a wholesale prices of USD 100 to a retailer with a net 30 day payment term, I would assume that the USD 100 includes all of the costs associated with that USD 100, including the costs of "financing" that USD 100 for 30 days.

Edit: I've known many people who started freelancing and who forgot to include all of their costs when calculating their rates, especially costs for things like repayment terms. This seems like a very easily overlooked problem for most new businesses.

Basically, yes. But many businesses don’t break it out as such (you can find by asking if they offer a discount for cash on delivery or even prepay).

I mean, yes, in a way. Suppliers are hopefully making money or they won’t be able to supply for a long time. On the other hand, large distributors love to include Most-Favoured-Customer clauses in their contracts so it’s often just an additional cost of doing business with them which has to be taken out of the margin.

Am I missing something? I don’t seem to understand how this is a swindle.

That’s because I initially wrote f*ked but thought I would stay polite.

You don’t think being ordered a very large amount of a product then being told months later that actually that was a mistake and you now have to take back the products while not having been paid at any point during the process and having them try to charge you for the costs of storing it and shipping it back to you sounds like a swindle?

I would love it if the EU or government would enforce equal payment terms for whole company. Lets say a shop wants to have a net 30 terms with their suppliers, then they should also offer net 30 terms for their customers.

This would equalize power dynamics. The large corp shouldn’t be allowed to demand immediate payment on one side and then just significantly delay payments on the other side.

I think it would be hard to sell regulators on "make business-to-business more egalitarian at the expense of consumers".

So I’d sell products to my customers (say bags of coffee) and then 30 days later come by their house (charge their credit card) to collect?

This is a terrible idea. Half of the people wouldn’t have the money and your company would become a debt collection agency. You’d be forced to charge at least 3X for the product.

That's the point. If you don't want that, then don't do it to your suppliers.

indeed. They should realize how ridiculous the whole net 30 days is .

You’re already giving the customers net 30 by accepting credit cards. Offering BNPL/afterpay would be another way to do it.

No, the credit card company is on the hook for your debt and will pay the business. The credit card company will be the one coming after you in 30 days looking to be made whole.

The merchant isn't being paid immediately either though. I don't think Net 30 is unusual for merchant accounts, but it's been a long time since I was exposed to details of payment processing (knock on wood)

> they should also offer net 30 terms for their customers.

Consumers already have Net 30 terms via credit cards.

The difference is that the shop isn't waiting for you to pay and the credit card company takes on the risk.

quite a significant difference for the complete population of Europe where basically no everyday purchases are made by credit card

That is very country specific. I could do almost all of my purchases with credit card if I wished. Or with buy now pay later. I don't really care, I pay my full balance on the CC at the end of the month anyway.

That's on them. If they want net 30, they can get it.

Groceries is a high capital very low margin business because you need to have all of the things in store before you can sell them, some of them for extended periods. Essentially this reduces the amount of capital you need to upfront and shoves it down to the next in line. The alternative would be to take a loan.

It sounds like that classic “focus on the things that can be measured easily” business finance attitude that causes things like “don’t kill your customers” to be missed.

The customers of distributors are retailers. They’re not killing the retailer. They’d be killing the supplier in this scenario.

Too bad "don't kill your suppliers" isn't a thing.

jjeaff - BNPL (buy now pay later) by companies such as Affirm may help level the playing field in applicable industries/cases as a 3rd party can shoulder the risk.

With BNPL, small companies are paid right away (within 1-2 business days), and the BNPL provider is responsible for collecting payment from the other party.

I don't think BNPL it would apply in this case specifically as the grocery industrial complex seems stuck in the last century, but in other cases it is an innovation in payment terms that could help.

Full disclosure - I have no affiliation with Affirm or any other BNPL provider.

I had similar lessons in an intro Accounting class I think, they compared the common "2/10 Net 30" payment terms, where you could take a 2% discount if you paid the invoice within 10 days. Annualized, that's a ridiculous rate of return and you'd be foolish not to do it if you have the cash on hand.

If the terms are simply "net 30" with no early payment discount and no late payment penalty, there is no incentive for the customer to pay on time.

> But the general wisdom is to always try to take maximum advantage.

While in Japan everything is paid up front because this is what is culturally appropriate.

That’s more specific to the food business.

I run an advertising company and we always take payment in advance and work with several large (publicly traded) companies.

I don't believe it's "the food business" as much as "suppliers" in general. I know non-food industries that operate this way, and it's common enough that accounting classes I've taken covered some of the basics of these.

Advertising or informational industries (e.g. non-tangible goods industries) seem to operate differently, as you've said.

Maybe not even suppliers and just organizations. I once offered tutoring services to someone who was working with the VA to get their degree. Since it was a subject outside of their normal scope and I was not a contractor with the VA I had to fill out paperwork and even then it took a year to get approved and paid for the services. Thankfully I wasn’t doing this for a living but as a favor and the person I was working with was very persistent in following up with his have supervisors otherwise I would given up long before.

I primarily do direct mail which is tangible. But the margins are thin and postage is such a big part of our cost that if a customer was going to skip payment we’d need 10 new orders to cover the loss.

So it makes sense to never extend credit.

I do think it’s very industry specific and food / retail as one of the worst.

What is direct mail? If that's rhe equivalent of UPS/USPS, then that's a service, not a tangible good. A tangible good would be something more like a part used in a manufacturing process, which is where the commonality to food comes into play - food tends to have many ingredients that come together into a final product - but anything following this tangible good line, from my experience, will follow these terms.

The reason kind of seems to be to give more flexibility to the supply chain. If everyone required payment upfront to get items to shelves or lots for customers to buy, then the risk goes more fully on the last link in the chain. It appears this pattern began to spread the risk to the entire chain.

Direct mail is junk mail. I help the dentist, roofer or gym in an area send advertising snail mail to the homes near them. Efile there is a service element, we also print the ad and send it. So it’s definitely also (and primarily) a product business.

I know of a few retailers that operate on Net 270 terms for their smaller vendors (Looking at you, Home Depot) and Walmart would tell us that they would reset the 'calendar' if we would call and ask for the status of a payment.

This was 2003-2006ish, for the record.

>Walmart would tell us that they would reset the 'calendar' if we would call and ask for the status of a payment.

How the hell is this even legal?

By agreeing to it when you go into contract with them.

A tangent but what were you selling if i may ask? I'm developing a little bluetooth device that lots of people in a large hobby would find interesting and was fantasizing about pitching the prototype to a reseller.

more specific to the physical goods business. if we establish a relationship where I'm regularly ordering merchandise from you - invariably we set up a regular billing cycle w/ a 30 day payment-from-invoice.

I have experience in the semiconductor industry and it operates similarly to what the post described

Net 30 is how a lot of Switzerland operates. You can buy all kinds of things - as a consumer - on a "pay later" basis. Flights, groceries, appliances, insurance, you name it. It's a level of trust that's pretty unusual in other countries, though you can bet they'll keep chasing you (and there is a national debt register). QR codes have replaced paying in slips, but they'll send you the code in a letter/PDF and you have a month to pay.

But from the industry side. At the big corp level this is all handled by some CRM/Oracle/IBM/SAP system and once things have been approved by whatever chain of people need to sign off, the payments are automatically sent out. The flip side is that if someone hasn't approved something, or they're waiting for paperwork unbeknownst to you, you have to wait until they do another run. So you have to nag them. The people who bought the thing from you are probably not the people who will actually pay you.

And yet, if you’re a big company, transactions are expensive. If small companies need frequent payments and won’t float AP, why would you buy from them? Would you rent an apartment that insisted on daily payments? (Ok, bad analogy, but you get the idea).

I don’t have a good answer, but this isn’t a one-sided thing where the big guys are taking advantage of small companies. This is also small companies agreeing to operate the way big ones do in order to get a foot in the door.

Where have you been renting that didn't insist on payment up front?

Everywhere I've seen you've payed that months rent by the ~5th of that month or they come after you for interest.

Almost like I acknowledged the specific analogy wasn’t great because rent is typically pre-paid.

Fine, let’s talk post paid. Electric bills. How you would you feel about an electric company that sent you an invoice and wanted to be paid daily? Yes, yes, the analogy is also imperfect because consumer electric companies can do auto-pay and walmart generally does not for small vendors. But please try to see the point even with a less than totally perfect analogy to consumer life.

> How you would you feel about an electric company that sent you an invoice and wanted to be paid daily

This would be trivial via Direct Debit.

Maybe your anologies just don't work, because the situation is completely different? The payment terms spoken about above are not to minimize transaction fees, often enough they are 90 days after the order is completed even for a single order, how does that minimize transaction cost (and how is that comparable to electricity bills?)?

I know that in Australia the terms in groceries are horrendous. Generally, frood vege suppliers have to buy specific boxes for delivery (from the supermarket chain) they then still have to pay rent on those boxes and if items don't sell they have to take them back (and pay a box use fee again), make items available at discount for specials run by the supermarket, on top of that the payment terms are as described above. Essentially the big chains don't take any risk, and the small suppliers all the risk. This might be particularly bad because the market is dominated by 2 chains. Supposedly Aldi and Lidl were much better at the time, because they tried to break into the market.

I would expect the electric company to work like EZPass does where you're expected to maintain a non-negative account balance that they pull money from when you go through a toll and you either periodically top it off by stopping in and paying cash or letting them do so automatically (via direct deposit / CC).

This situations where paying in advanced _every_ time would be cumbersome just means the customer has to maintain a balance. There is also a difference between a business and residence.

It can vary by landlord and jurisdiction. Some places you’re technically paying for the month you just finished, others you’re paying for the month upcoming. It only really differs on the accounting after the first month.

Interesting - in India, I have only paid house rent at the end of the month (post-paid). It was a shock to me to learn that in UAE they expected rent annually, in "advance" (I guess it is smart as that weeds out those living paycheck-to-paycheck, who may default on rent)!

I liked the example, it illustrates it from a different perspective. However, why not paying daily? Hourly? Minutely? In the age of computers...

Even in the age of computers each transaction has a cost and a risk associated. And there is no upside to large companies. They don’t want to receive per-minute payments any more than they want to send them. So if 95% of a business’ volume works one why, why invest in making 5% different just to deal with smaller vendors, who are already more difficult to deal with (for 100% good reasons).

AWS bills in seconds in some cases but still invoices monthly.

Right? Even cloud computing companies which technically charge you per-minute pricing end up rolling it into a single monthly bill at the end of the month instead of a CC transaction literally every minute.

In the repo market (overnight inter-bank lending) Fedwire daylight overdraft interest accrues every 15 minutes.

By my reading of the story, upfront payment wouldn't have changed the number of payments.

And forget about daily. It's very reasonable to want monthly pay, and should not be a burden at all. And monthly pay would need at most a month of float, on average probably less. That's not where the real payment issues are.

Yeah frequency of payments was an example, but kind of a red herring. Consider it as “running AP differently for a small subset of vendors” as an abstract concept. It’s expensive to do 5% of your business differently than 95%.

I believe the idea is that no vendors should get treated that way.

Yup, and not just that, but they can arbitrarily decide to not pay you until you either give a steep discount or give up pursuing it.

You can arbitrarily decide not to ship until prepayment is received.

But then they choose someone else to supply.

If you have enough brand recognition where they must have your product specifically, this usually means you are big enough that the payment terms aren't that big of a deal

There are businesses that act as middle man for this.

They’ll pay you say 97% of invoice. They’ll collect as they can

They call this factoring in the trucking industry.

Exactly, one type is called BNPL (buy now pay later).

> They do not care if you’re a small company with poor liquidity.

This is a feature, not a bug.

If you are in an inventory-rich industry, you do not want to deal with a supplier that has no working capital.

Goods first - money later sucks if you are a small startup. But it's much easier to work with inventory and figure out the money later than vice-versa. Toyota does not want to stop the production line because their order of ball-bearings showed up late and now they have to start a new purchase cycle.

It's the other way around I've found for a lot of the automotive industry. Most of the big automotive companies try to keep their suppliers a hop and a skip away from not being able to keep the lights on in borderline debt bondage to the auto manufacturer. Puts them in a much better negotiating position and makes sure that the profits go to the auto manufacturer rather than their suppliers.

That was half the reason for the chip shortage. Auto manufacturers collectively (and incorrectly) forecast a decline in demand in cars during the pandemic, cancelled a bunch of orders for chips and a bunch of the suppliers went under. Then started offering 10x-20x for replacement chips from their few remaining suppliers (that pretty much all went to buying out wafer slots that would have been non-automotive chips) to keep a $35k car not being able to be shipped for the lack of a $0.30 part.

In my experience, the larger the organisation, the longer the presumed payment terms. I've learnt to demand payment in advance, otherwise I'll get caught up pos-hoc in the labyrinthine and entirely cloistered whims of accounts departments who seem to think they're morally-placed to dictate whatever terms they wish.

Worst in my experience was Unilever, who simply assumed they could pay in 90 days, which ..er.. rankled. Thankfully the job I did was directly for someone quite high up, so a week's worth of pointed emails and calls somewhat hastened payment.

i've read comments like this before on hackernews. Are the payment terms not on the contract signed? It seems like something you'd really want to understand before starting a project...

They generally are, but if you say net 30 and set a % penalty for not paying in net 30 (common), when a multi-billion dollar corporation decides to do net 90 and won't pay the penalty, what are you going to do as a freelancer? Sue them? The amount of money you spend on legal fees would likely be multiples of the penalty fees. And it would delay payment further. Big corporations rely on this power imbalance.

yeah, i see your point. I think I fall into the trap of believing what some random piece of papers says always reflects reality. I worked for a large smallbiz ( independent pharmacy chain ) early in my career and it was like pulling teeth to get insurance companies to reimburse/pay on time and correctly despite what the contract said. We had about a dozen people who's only job was to watch them like a hawk and stay engaged with their AP department and nurture a relationship.

It can get much, much worse. We had a customer that set a net-60, it was the first time we landed an "enterprise" type deal and we sort of missed the net-60 part of the contract (I know, lol). So after 2 weeks we called the customer asking if everything was alright and that we hadn't received the payment yet. He let us know that a net-60 doesn't mean they reserving 60 days to pay, it's that they actually pay after 60 days. Well that blew our minds, but we patiently waited the 60 days.. nothing. So we called to their finance department and we got a callcenter worker in a far away country that actually tried to negotiate a 10% discount on our order for a more speedy payment.

In the end they paid 2 weeks after the net-60 expired. Probably calculated to be maximally annoying with the least amount of risk of legal costs. Really takes the wind out of you. Selling to California startup type companies is so much nicer, I once took a call, negotiated a whole new pricing model closed the deal, entered the product details into FastSpring and the customer paid 40k for the yearly subscription on that model that same afternoon.

I wonder how you could word the contract such that failure to pay on time would be onerous enough that the big company would actually move on it. Something like penalties + legal fees + treble damages or something.

Ask a lawyer!

Our lawyer told me years ago that you are SOL and therefore to avoid doing business with assholes and to try to acquire leverage over debtors where possible and to expect to lose money once in a while.

Good luck getting $BIGCORP procurement department to sign off on that deal. Favorable seller terms will be immediately redlined.

Reminds me of one of my favorite videos on the internet:

"F*ck you, pay me"[1]

In which Mike's lawyer makes the very good point that you should really put an attorney's fees provision in your contracts so that the purchaser pays your legal fees if you need to chase!

[1] https://www.youtube.com/watch?v=jVkLVRt6c1U

I guess it depends upon the type and size of the job in question. A lot of my work is invoiced upon commitment or completion, and in some cases (as with Unilever here) it's simply decided that their terms over-ride that on my invoice somewhere after the event.

I tend to disagree with that mentality.

One thing about credit accounts is that it allows the people placing the order to be different to the ones involved in settling the account, and for the latter to be handled asynchronously rather than holding up the order.

Imagine I need some stuff now (or on the next truck), I can place the order and it will be immediately loaded on the truck. Then separately, they'll send an invoice to the accounting department who will settle it over a week or two, which may involve moving money around, foreign exchange, etc.

I've seen this even worse outside of the US, and just how ... poor trade routes, trust and "markets" are.

It really makes me appreciate the US more. But I am still dismayed that I'm all caught up on the state of commerce and that its not even more streamlined and sophisticated.

It's worse than that because they will drag out payment after the term has passed.

My first job out of school was for a mom-and-pop manufacturing company. I got an inquiry one day from a very well known company, and mentioned it to the boss. He gave me a long lecture about why we didn't work with that industry. They were notorious for stringing their suppliers along and holding them in a sort of debt bondage. I remember responding with a FAX (yeah, that's how it was done) explaining our terms: Pay in advance. The boss made sure that the business was never beholden to a single large customer.

We also had a draconian, hair-trigger, credit hold process. I remember overhearing the scheduler / receptionist telling a customer: "You are on credit hold right now, we can't schedule your next production run."

That to me sounds like we might lose revenue, but at least we are unlikely to lose money.

It becomes a problem if you borrow to pay for tooling & plant in anticipation of getting paid for product. You might lose your shirt.

Cash flow is the be-all end-all. If you cannot make rent, you are done. Big business does not care. Working for a big business, I have encountered other small companies who do not want to deal with us - getting $MEGACORP to pay their bills on time is a foreign concept.

> gave me a long lecture about why we didn't work with that industry.

Automotive? That has big automotive energy.

I think this is needed tbh.

My fortune 10 company regularly pays our bills after the pay period - like 60 days late on a net 30. And then I, a technical person that just wants the damn AWS bill paid so I stop getting emailed about it, have to chase down the people responsible internally, even though they get the same billing emails. Because for some reason they didn't like the old way of setting up auto pay. Oh. And they will send literal paper checks to pay some bills... to closed offices since everybody works from home now.

The accounts payable department wastes more time than they save.

Yep, when I started out in business I focused a lot on price (and hence our margin). I then learned that with large distributors / customers the more important aspect can be the terms because "terms and conditions" of sale can make an order not an order, a payment be delayed months and even the price paid not how much you receive.

I've heard of enough similar stories that if I was ever in this sort of position I would be factoring in the risk that the large company decides to not pay.

In the case of food retailers you also need to consider the time on shelf. To take the coffee example. If any average shop buys 4 cases of coffee (24 bags) and on average sells 2 bags per week, then the last bags will sell after 12 weeks. On avg. it will be 6 weeks (42 days). Product will also spend 1-2 days in transit and might not be unpacked on the floor until 1-2 working days later (so maybe 2-3 days). We can assume payments take 1 day to process. So 46-48 days in total. So 50 day payment terms means they are more or less cash flow neutral. Numbers are made up, but roughly align with my experience of selling other durable food to grocery retailers.

In the food business net-terms pain starts from the retailer and work backwards towards the manufacturer.

OTOH, it's very difficult to raise money as a retailer or distributor but 1000x easier (still hard) as a brand.

Yea but as a food producer (also a coffee roaster) I also get payment terms from my suppliers. And it all kind of makes sense when you think we are all adding value and margin. The “loan” everyone is giving to the people later in the chain is the cost of production rather than the final sale price. So for a 100k order it might cost 50k to produce in cost of goods. That 50k to the suppliers is probably 35k etc.

It absolutely is abusive behaviour, and it's unfortunately pervasive across industries.

Bethesda is infamous for withholding payment to smaller companies to force an acquisition of IP. And (not to get political) big-shot celebrities like Donald Trump or online influences do it too. Often it's even worse than "we'll pay you later", it's "give us a steep discount and we'll pay you back in exposure/future opportunities to make a lot more."

I remember reading that one reason suppliers are willing to work with WalMart despite the low prices they pay is that WalMart doesn't play these games with delayed payments - they pay exactly when they say they will.

They also have: https://walmart.c2fo.com/walmart

90 day "credit" terms are typical across many industries. Yes, it sucks, but also, it's a reason to not over extend yourself while trying to get to the next level.

My ($x billion+-sized) employer pays vendors within 2 business days of the invoice being submitted through the internal payment process, regardless of whether the payment terms allow for us to do net-30 or net-60. It doesn't meaningfully affect our cash flow to delay payment, but it makes a huge difference for our vendors. As you've noted, a delayed payment can literally be the kiss of death for a small company.

After working at a small engineering firm whose owners were pretty open about the finances. Every time I read or hear someone ranting about how people with small time incomes and few assets have to 'pay their bills' I think back to the owners of that company bitching about this or that fortune 500 customer just up and not paying for stuff for months after it was delivered.

In the mid 00's I had a digital agency and we hosted sites for a few fairly large hotel chains. One day, I got an email from procurement at one of them that said, "we're holding payment on all outstanding payables until next month." The hosting billing system shut their site down at 12:00pm the day after payment was due and dutifully redirected to the "pay your bill online page".

Ten minutes later I get a frantic call from procurement, begging me to put the site up. I fumbled with the billing system, and finally told her, I think the only way to fix it is make a payment... which she did. $6,200 on credit card. The customer never missed a payment after that.