Our Supplier Cut Our Credit Terms: How to Finance the Working Capital Gap When Vendors Tighten Up

The email usually comes from the supplier's credit department, not from the sales rep you know. Effective with the next order, your terms are changing. Maybe net 60 becomes net 30. Maybe they want a deposit. Maybe it is cash in advance until further notice. Nothing about your customers has changed, your sales are steady, and yet you now need to find cash you did not need last month.

This is one of the fastest ways a healthy company runs short of working capital, and it is more common than most owners expect. The good news is that the problem is usually measurable, it has a limited number of causes, and there are financing structures built to handle it. This guide walks through what is happening, how to size it, and what to do next.

Why suppliers tighten credit terms

Before you react, find out why. The answer changes the fix.

Their credit insurer reduced your limit

Many suppliers insure their receivables. When the insurer lowers the limit it will cover on your company, the supplier either shortens your terms, caps your open balance, or asks for payment up front. The insurer may be reacting to your latest financial statements, slow payments reported by other vendors, your industry, or simply its own portfolio decisions. Your supplier often has little say in it.

Your payment pattern slipped

If you have been paying at 70 or 80 days on net 60 terms, the supplier's credit team has noticed. Stretching payables is a common way to fund growth or ride out a tight quarter, but it tends to end exactly this way.

They saw something in your financials

A loss year, a covenant issue, a lien filing, a lawsuit, or a thin balance sheet can all prompt a review. So can news that your bank relationship is under pressure.

The supplier has its own cash problem

Sometimes the tightening has nothing to do with you. A supplier under pressure from its own lender will pull cash in wherever it can, and shortening customer terms is one of the fastest ways to do it.

Ask the question directly and politely. A supplier that is reacting to an insurer limit may restore terms once you share updated financials. A supplier reacting to slow pay may restore terms once you show a track record of on-time payment. Neither will tell you unless you ask.

How to size the gap

The working capital hole created by a terms change is simple to estimate. Take what you buy from that supplier in a typical month, then multiply by the number of days you lost, divided by 30.

As an illustration: a company buying $900,000 a month from one supplier that moves from net 60 to net 30 loses 30 days of trade credit. That is roughly $900,000 of cash that now has to come from somewhere else. If the move is to cash in advance, the company loses all 60 days, which is roughly $1.8 million, plus whatever lead time exists between paying for the goods and receiving them.

Run the same math for every supplier whose terms have changed or might change. Then compare the total to the availability you have today on your line of credit. If you want a clear picture of how payables, receivables, and inventory interact, our guide to the cash conversion cycle and borrowing base availability walks through the numbers.

What to do in the first two weeks

Protect the supply

Losing terms is painful. Losing the product is worse. Keep orders flowing even if that means paying up front on a smaller volume for a few weeks while you work on a longer-term answer.

Talk to the supplier's credit department

Offer current financial statements, a short explanation of recent results, and a payment plan for any past-due balance. Ask what would restore terms and on what timeline. Some suppliers will accept a standby letter of credit or a smaller deposit in place of full cash in advance.

Build a 13-week cash forecast

A weekly forecast shows exactly when the gap peaks and how long it lasts. It is also the first thing any lender will ask for. Our guide to bridging a shortfall between banking events covers how to use one.

Tell your lender early

If you already have a line of credit, your lender will see the change in your borrowing base and payables aging within a month or two anyway. Hearing it from you first, with a forecast and a plan, is very different from discovering it in a field exam. Lenders who are surprised tend to add reserves and tighten terms of their own.

Do not cover it with expensive short-term money

Merchant cash advances and similar daily-payment products can look like a quick fix. They usually make the working capital problem worse, and some of them file liens that can create issues with your existing lender. If you are already in that position, read our guide to refinancing out of a merchant cash advance stack.

How a borrowing-base line of credit fills the gap

Losing supplier credit means more of your inventory is paid for with your own cash. An asset-based line of credit lends against exactly those assets: your receivables and your inventory. As you pay suppliers faster, you hold more paid-for inventory and, eventually, more receivables, so availability tends to rise with the need. That is the main reason ABL is often a better fit for this problem than a fixed term loan or a cash-flow line sized to last year's EBITDA.

What lenders will focus on

• Why terms changed. Lenders will ask. An insurer limit cut is a different story from a supplier that got tired of waiting 90 days to be paid.
• Payables aging. Large past-due balances to critical suppliers are a risk to the lender, because a supplier that stops shipping can stop the business. Some lenders will reserve against significantly past-due payables.
• Supplier liens and title terms. If a supplier holds a purchase-money security interest or retains title to goods until paid, those goods may be excluded from the borrowing base. See our guide to supplier liens and inventory availability.
• Inventory quality. Paying for inventory sooner only helps if that inventory is eligible. Slow-moving or obsolete stock will not add much availability.
• Your forecast. A credible 13-week forecast that shows the peak need and how it resolves is often the difference between a quick process and a slow one.

For a plain-English walkthrough of how availability is calculated, see how much can I borrow against my receivables and inventory.

Other tools worth knowing about

Depending on the business, a lender may be able to issue letters of credit to suppliers from within the facility, which can persuade a supplier to restore open terms. Import-heavy companies sometimes use in-transit inventory structures. Businesses buying against specific large orders may consider purchase-order financing for a period. Each has tradeoffs in cost and complexity, and none of them replaces fixing the underlying reason terms were cut.

Signs the problem is bigger than one supplier

If two or three suppliers tighten at once, take it seriously. It usually means credit insurers or trade reporting services have flagged your company, and other vendors will follow. It can also be an early warning that your bank is losing interest, which our guide to the signs your lender is losing interest covers. At that point the question is no longer how to cover one gap. It is whether your overall capital structure fits the business.

How DCE helps

Don Clarke is a 2021 SFNet Hall of Fame inductee, a Lifetime Achievement Award recipient, and the author of "Asset Based Lending Disciplines," the first textbook on asset-based lending. He has trained more than 5,000 lending professionals at institutions including GE Capital, JP Morgan Chase, Lloyds, and Barclays. That background means we know what a lender will ask when a borrower's supplier terms change, and how to present the answer before it becomes a concern.

DCE is an independent advisor and loan placement consultant. We advise borrowers on sizing the working capital gap, help them prepare the forecast and collateral information lenders need, and introduce them to lenders whose appetite fits the situation. We do not lend, underwrite, fund, or approve financing; every credit decision is made by the lender. See our advisory services and how our process works.

Our sister firm, ABLC (ablc.net), serves lenders with due diligence, field examination, and training services.

Educational only; not legal, tax, or investment advice. Figures in this article are illustrations, not quotes or offers. Financing availability, advance rates, and terms depend on each lender's review of the business.