Why do Companies “Stretch Out Their Payables?”
Question: I saw the story on SRC Electrical. The loan increase paradox was a good lesson. However, let me ask this question of you. What sort of payment terms do they give their customers? Assume net 30. (Payment no sooner than 30 days, that is.) These are interest-free loans from small businesses to oftentimes large businesses.
Two weeks ago, I declined an opportunity to sell an industrial control because the customer’s standard payment terms are long, net 90 days. Two days later, they needed another one of these controls. At about $11,000 each, my cost, it would really limit my cash flow to have that much money tied up as an interest-free loan to a major international corporation. It is the standard means of accounts payable and receivable in this country and it never gets any coverage in the press. Why not?
Paul Solman: Why no media coverage? Because the issue is technical, I suppose. Because it’s about numbers, I’d guess. And because it’s a technique as old as capitalism itself.
That said, your point is well-taken: “Stretching out your payables,” as it’s called, is worth reporting. When it’s happening all over the place, that’s a traditionally tell-tale sign of economic weakness.
It might be worth noting that stretching out your payables is a key advantage of size. The bigger you are, the harder you can squeeze the little guys who depend on you. It is also one of the only ways for companies with cash flow problems to stay in business. (Just between you and me, even entities within public broadcasting have done what you describe.)