Big companies requiring payment terms of 75 days and longer of small businesses
An owner of a subcontracting company says that large companies can demand payment terms of up to 120 days.
Jaakko Kilpeläinen, one of the owners and the temporary CEO of Valtimo Components Oyj, speaks openly in his role as a member of the board of Pohjois-Karjalan Yrittäjät, the North Karelian regional SME association, about a problem facing many companies: long payment terms.
Kilpeläinen recently learnt that its cooperation partner, the business unit of the railway company VR Fleet Care Ltd, was demanding 45-day payment terms.
By law, the payment term between businesses is 30 days, unless otherwise agreed.
“When we received approval for a precision engineering pilot series a few weeks ago, we noticed that their system showed a default payment term of 45 days, which could not be modified, Kilpeläinen says.
He quickly sent an email about the matter, which VR Fleet Care has not replied to.
“We have no option but to accept. I emailed them politely, saying we have noticed a system error. Of course, I was being a bit humorous,” Kilpeläinen says.
Many businesses are all too familiar with payment term problems, and for small subcontracting companies in particular, long payment terms can cause financial problems and even the risk of bankruptcy. Tiina Toivonen, Legal Affairs Manager of Suomen Yrittäjät, the Finnish SME association, considers the Valtimo Components example regrettable.
“Unfortunately, some large companies act in a way that causes a lot of financial pain for small contractual partners. However, in such situations the business owner has the right to cite the law and say that if a payment term of 45 days or longer is applied, then it must be agreed between the parties. By law, a payment term of longer than 30 days in a system has no force. Such behaviour is not acceptable from the point of view of financial responsibility either.”
Payment term of 120 days from public company
Kilpeläinen says that changing the 45-day payment term is all but impossible if he does not want to lose the cooperation partner. He has experience of even more barefaced proposals.
“Some large clients make long payment terms the conditions for ranking and serving as a subcontractor. We were once the subcontractor of a large public company. They said that if we weren’t ready to increase our payment term to 75 days, we wouldn’t get first class subcontractor status.”
Kilpeläinen says that such a status would have given his company a better position and possibly more orders. He replied sarcastically in that situation as well.
“I suggested that if that public company needed a loan, the contract should state how much money they wanted to borrow, but that we wouldn’t accept a 75-day payment term. After all, a long payment term is basically a free loan to a big company. SMEs that subcontract for bigger companies act as their financiers.”
The company in that case offered the “option” of a 120-day payment term, which would have provided the best score as a subcontractor.
Factoring common
Valtimo Components Oyj has been forced to sell its invoices to get 80% of its receivables faster. Many other subcontractors do the same.
“It’s not free. “We’ve used factoring, which ranges in price from 0.5% to 1.5–2% of the finance amount per month. This is a painful issue for us and many others,” Kilpeläinen says.
Factoring is when businesses sell their accounts receivable in exchange for a loan. The company gets the money in its account as soon as it sells its invoice, regardless of when the client pays it. Factoring an invoice of €1,000 for one month costs around €15.
Kilpeläinen says that the constant use of factoring and higher interest rates quickly eat into a subcontracting company’s profits. Interest rates have risen rapidly over the past year.
“If the subcontractor has strong finances, it can fund long payment terms by itself. In the current economy, not many SMEs can afford this.”
Valtimo Components Oyj is an engineering company specialized in precision mechanics which manufactures for sectors such as defence and pharma. The company was established in 1999.
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