Lawyer opposes Fonterra's new payment terms
Recently, my colleague Sean Maskill argued that the new payment terms that Fonterra has imposed on around 1,000 of its suppliers are lawful and makes good business sense for Fonterra.
Fonterra;s terms state suppliers will be paid "61 days following the end of the month within which the invoice is dated", meaning they could have to wait up to 90 days from invoice to payment.
This issue continues to cause concern with the South Canterbury Chamber of Commerce recently meeting with Fonterra managers over the company’s payment arrangements with its vendors.
Although Fonterra may be acting lawfully by “renegotiating” its payment terms, lawfulness is not the end of the story. Effectively, Fonterra’s new payment term allows Fonterra to use its small business suppliers as a source of short term finance to prop up its balance sheet. In doing so, Fonterra risks damaging its relationships with these suppliers and exposes itself to reputational risk.
The relationship problems created by the new payment terms are broader than reduced goodwill, and may have financial repercussions for Fonterra.
We expect some suppliers will prioritise work for other clients, who pay more promptly, over Fonterra. Other suppliers, recognising that not every client is a good client, will decline work from Fonterra.
However for some of Fonterra’s suppliers, their ability to meet commitments as they fall due will be threatened, especially during the transition to the new payment term. Some suppliers will have no choice but to go to their bank and borrow to tide them over. The effect is that those least able to afford extra financing costs are paying them, instead of Fonterra, causing these businesses significant cash flow difficulties.
We have seen reports citing anonymous suppliers who claim they will look to increase their margins on work performed for Fonterra, to compensate them for the wait for payment. Businesses know, even in a low inflation environment, that a dollar today is worth more than a dollar tomorrow.
Fonterra’s reputation as a good creditor is damaged by it choosing to prop up its balance sheet at the expense of its suppliers’ balance sheets. This is not helped by Fonterra, at the same time seeking to impose a 10% cut in what suppliers charge Fonterra.
With 17 of Fonterra’s staff earning more than $1 million annually and Theo Spiering earning over $4.0 million annually to July 2015, it is hard for small businesses to swallow being asked to charge less and wait longer for payment and some suppliers are refusing to supply to Fonterra on those terms.
Fonterra, as New Zealand’s largest company by revenue, occupies a unique position in New Zealand’s commercial landscape. Accordingly, it is held to a higher standard than other New Zealand businesses. Fonterra’s reputation is important not only for Fonterra but for New Zealand as a whole as an agricultural exporter.
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