Doing business on extended credit lines is as common as it is expensive, but often remains the only way.
I once visited a large poultry cooperative organization with one of my customers, who wanted to market a new vitamin and trace mineral premix line I designed. Everything seemed to be going well, as the premixes were designed for optimal profitability, the margins were reasonable, and quality was meticulously assured. The deal broke, however, when the president and CEO of the cooperative asked for a 12-month credit line. In less than five minutes, we were driving back to our offices having forgotten all about this “opportunity,” because this 12-month credit line meant an exposure of several million dollars, which my client was not ready to gamble upon.
For some readers, such stories might seem exotic and extraordinary. For others, however, they recognize their own market conditions. In general, it is not uncommon to extend a courtesy credit line of 30 days, with 90 days being a more generous term, especially among trustworthy business partners. There are virtually no cash-on-delivery deals in our industry or any business-to-business (B2B) deals. Even these widely acceptable terms assume a robust banking, financial and justice system and an ethos of honor and credibility, which are common in several markets, but sadly not all.
Two ways to extend credit
When certain markets demand extended credit lines, and this is the only way a nutrition business can enter or even survive in such a competitive environment, there are only two ways this can be accomplished. And, lamentably, neither of these ways benefit of the end user: the farmer. But, in the markets we are discussing, the farmers are also being forced to accept extended credit lines backwards from their own buyers. As such, they simply transfer the lack of liquidity from their buyers to their suppliers. This is not only a matter of liquidity, but also a mitigation of risk because a default from a buyer often causes a cascade of defaults along the line that affect the farmer and consequently the nutrition supplier (among all other suppliers).
Incorporate financing costs into margins
The first way to afford selling to a market that requires extended credit lines is to incorporate the cost of financing into margins. This is the most common method, easily accepted by customers and, in some cases, the ability for them to buy on extended credit overpowers any concerns over other issues. As it happens, in the animal industry margins for farmers are already very slim, and spending them on securing an extended credit line might be a survival reaction but certainly not the way to make real money. Of course, there are nutrition suppliers that can absorb the cost of financing an extended credit line, passing it on to the marketing budget – if the customer is an influential enough entity – or if they have other businesses that can help for a period of time.
Lower expenses required
If someone cannot finance the extension of a lengthy credit line to customers, the other alternative is to alter the ratio between cost and price by lowering the expense required for the proffered product. This can be done, quite honorably, by finding alternative suppliers or partners, by buying raw materials in volume or through extended credit or by focusing on product codes that are more profitable. Finding a new market is also an option, but that requires a totally different line of thinking and action. In the end, the cost of products sold on extended credit line must be lowered to absorb the cost of financing. The same markets also suffer from a higher-than-normal default rate and, as such, the cost of insuring invoices is making matters even worse. Some suppliers simply refuse to sell to certain buyers because they cannot afford the cost of insurance.
Offer less for the same amount of money
Finally, if none of the above can be accomplished, there are those who opt to remain in business by offering less for the same amount of money. They will simply skimp on quantity or quality in hardly perceivable ways that may or may not affect animal performance. This is not something that anyone will admit publicly, but having lived on this world for 50 years and worked in three continents for 30 of those years, I can attest that this is not as rare as some may want to believe. In some regions of the world, this is the norm, and it is not only accepted and recognized by customers, but it is also taken into account when doing business. This is not the way I do business, nor do I condone it, but denying such business practices exist is tantamount to questioning the diverse nature of humanity.
In closing, I would like to bring up another example that proves there are many ways to do business, and that human ingenuity can overcome any hurdle. I recall a potential customer who refused to update their pig nursery program to a more proper – and less expensive – version, only because their current supplier was helping them dispose of one of their business byproducts. This was a clear quid pro quo case where both sides exchanged benefits and accepted losses. It was not a very profitable solution for either, but they both still survive in a very difficult market.