Extended Payment Terms During COVID-19

COVID-19 has taken a toll on almost every aspect of our lives; it has spiked unemployment through layoffs and business closures, shut down public events and flipped business models on their heads. Prior to the pandemic, businesses would provide goods and/or services and subsequently receive payment. Mid-pandemic, that workflow looks a lot different. Some industries and large companies are beginning to increasingly extend payment terms to those they work with – something that can seriously throw off the cash flow of the small businesses they work with. If your business is involved in this payment model, or if you’re interested in learning more about it, you’ve come to the right place. We’ll be your guide to learning about extended payment terms during COVID-19.

What are extended payment terms?

In short, extended payment terms are policies where one company allows its customer to pay their invoices over a longer-than-normal time period. Extended payment terms are usually 60, 90 or 120 days.

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EXAMPLE: A local candle company sells their candles at several stores that are a part of a large nationwide retailer. The candle company sends several invoices to the retailer for the products purchased, totaling $100,000.

The retailer receives the invoice and from there has 30 days to pay it, per it’s 30-day payment term contract with the candle company.

At the end of the 30 days, a payment of $100,000 is sent to the candle company for their product.

Why are businesses using extended payment terms during COVID-19?

Supply chains and the businesses associated with them are using extended payment terms during COVID-19 to help balance cash flow and restore economic normalcy during an otherwise unusual financial time.

Think of it this way – many small to midsize businesses do not have a website, let alone an online platform to deliver their goods or services. They often rely on selling their product or renting out their services to larger companies for profit.

The larger businesses they’re working with are also not making enough money because of reduced foot traffic to stores, the mandated shutdown of certain industries and the nationwide call to stay at home when possible. In order for the large retailer to keep their business running smoothly, they decide to implement extended payment terms to their suppliers – paying them over a longer time period than originally settled upon – keeping them out of debt.

How are extended payment terms during COVID-19 affecting small business?

Extended payment terms during COVID-19 are affecting small business by taking away the typical payment schedule used by companies they work with. This is not the most ideal situation for the small companies supplying products or services to said retailer, but smaller companies often rely on the steady business of their larger counterparts to keep a continuous cash flow.

In this uncertain economic time, hundreds of small businesses have been forced to permanently close their doors. No money is coming into the business, but money is still expected to go out in the form of paying bills and suppliers.

If small businesses want to stay open, they must find a way to change their current cash flow cycle to better match the payment terms of the businesses they make the most capital with.

How has COVID-19 affected business cash flow?

The COVID-19 pandemic has drastically affected how we as a nation do business. It has altered our supply chain, changed how customers shop and forced many service-based companies to shut down in fear of spreading the virus.

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EXAMPLE: A local candle company sells their candles at several stores that are a part of a large nationwide retailer. The candle company sends several invoices to the retailer for the products purchased, totaling $100,000,

Typically, the retailer pays the candle company every 30 days for their product. However, due to the COVID-19 pandemic, the retailer (who primarily relies on foot traffic for sales) isn’t moving as much product and therefore isn’t making enough money to pay all its contracted suppliers.

The retailer decides to extend their payment terms with the candle company to every 90 days, giving them more time to sell product.

This change drastically impacts the local candle company’s cash flow: they rely on this retailer’s $100,000 payment every 30 days to pay bills and make payroll. In order to stay afloat, the candle company needs to find a way to return cash flow back to a balanced state.

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EXAMPLE 2: A clothing company regularly sells t-shirts to a nationwide clothing retailer. Typically, the clothing company sells clothes to the retailer every 45 days and gets paid when the product is sold.

The clothing retailer isn’t getting much foot traffic since people are told to only leave their home for essentials during the COVID-19 pandemic. Because of this, the t-shirts purchased from the clothing company are not being sold and the retailer has no need to purchase more.

This causes an issue for the clothing company. If the retailer isn’t selling their product and not ordering more consistently, where will they profit? How will they earn capital if their payment terms are exceeding the typical 45 days?

Extended Payment Terms – The New Normal

National and regional retailers and companies extending payment terms isn’t uncommon during times of economic uncertainty. As of June 2020, one of the largest fashion retailers is keeping $4 billion worth of its supplier’s orders in limbo, saying it will accept orders that have already shipped, but no more. Other large retailers are furloughing hoards of employees before pushing payment terms up to 25 percent of the initial payment contracts.

According to several media executives, advertising companies have made it the new normal to extend payment terms up to 90 days, giving their suppliers only two options: make it work or leave. This declaration comes as over 3,000 national and regional chain stores are ordered to close due to pandemic-related cash flow issues.

To prevent more closures, more and more large retailers are adding time to their payment terms. While this payment change is good for the businesses making them, the new cash flow model is not going over so well for the smaller, less-stable companies that supply goods and services.

Speaking of services, delayed payment terms from companies that contract services are forcing many labor-centric small businesses into bankruptcy.

Small businesses that work closely with larger companies should be taking precautions to ensure their business would survive if payment terms from their retailers changed. Hundreds of big market companies have already switched, its just a matter of time before more take the plunge.

How can I ensure my business’ cash flow is balanced both during and after the COVID-19 pandemic?

The best way to balance your business’ cash flow during and after the pandemic is by utilizing outside funding sources. During the pandemic, many banks and loan offices cut the number of accounts they would fund, but there are other solutions like invoice factoring or purchase order financing.

What is purchase order financing?

Purchase order financing is a funding option where a factoring company issues upfront capital for goods that have been ordered, but not yet delivered.  The funding can be used to cover supplies, costs and other expenses associated with shipping, manufacturing and purchasing.  

You can learn more by visiting our FAQ page.

What is invoice factoring?

Invoice factoring is the process of a business selling its unpaid invoices to a factor in exchange for upfront capital.

How can factoring help businesses experiencing new extended payment terms?

Factoring your business’ unpaid invoices can help your business by providing capital to balance your invoices, pay bills, make payroll and fund almost any other business expense you encounter while dealing with new extended payment terms.

Will I have to factor once the pandemic is over?

No, you will not have to factor when the pandemic is over. However, factoring can help your business adjust to the post-pandemic market.

If your business likes the financial security factoring provides, you can continue factoring for as long as you’d like.

What companies are using extended payment terms?

Many large corporations are experimenting with extended payment terms. Here are just a few well-known industries giving it a try:

• Credit Card Companies
• Rent and Housing Corporations
• Insurance Companies
• Heat, Gas, Electric and Water Companies
• Income Tax Agencies
• Airline and Travel Businesses