In the current market, allowing longer payment terms “can be a killer” for independent pallet companies. Pallet companies, facing higher prices for lumber, nails and cores, find themselves in the middle. They are being squeezed by both suppliers and customers alike. And the bad news is that over the last several years pallet customers are increasingly looking for longer payment terms. One contact interviewed for this column even said that net 120-day terms have become commonplace for some larger accounts.
But that reality may be starting to change as the pallet industry faces one of toughest supply crunches in history. Customers that demand long payment terms may find themselves without pallets as pallet and lumber prices skyrocket.
First Alliance Logistics Management (FALM), a national brokerage and pallet management firm, confirmed that it has experienced incidents where customers are either expecting longer terms upfront or submitting a notice of extended terms. These moves, FALM notes, are typically from larger customers. “We certainly understand that cash gets tight due to different drivers,” the company responded in a statement. “We also know that cash flow is the lifeline in being financially stable and sustainable.”
Ben Remmey, president of Remmey – The Pallet Company, agreed that some pallet providers are going to be particularly sensitive to requests for extended payment terms, given high current lumber prices that have pushed up accounts receivables as well as inventory costs. He concurred that the longer payment terms are more likely to be requested by larger companies. “A lot of time it will depend on their ownership structure,” he said. Publicly held companies or those with private equity money are looking for ways to expand their cash. “We see it pushed down pretty hard in terms of either extended terms or early payment discounts like 2% – 10 days.”
Interest in extended terms comes in waves, Remmey observed, and it is clearly evident when this directive is given to the procurement team.
For both new and recycled pallet providers, longer terms can be devastating. On the new pallet side, the inflated price of lumber means that a $100,000 line of credit now effectively covers only half of the inventory and accounts receivable that it did prior to the current spike in material costs. On the recycling side, retailers are monitoring payment terms for cores very carefully, while recyclers are battling higher labor and logistics costs in addition to the price of lumber and nails. “You are trying to keep net 30 on your cores, and trying to keep your sales to net 10, net 15 or net 30,” said one pallet salesman who didn’t want to be identified. “It’s a struggle and some guys are just giving up.”
Tactics for Dealing with Longer Terms
Pallet professionals interviewed for this article emphasize the importance of pushing back against longer terms. Here are some of the suggested approaches:
• Just say no. “In such a strong market, I see no reason for taking business from customers who want longer terms!” one lumber broker observed. “Everybody is too busy; cash flow is tight because of lumber prices.” In the current market, where there is more demand than supply, now is the opportune time to “fire” problem accounts, including those which are demanding longer terms. It is often an unpleasant conversation, but if they don’t accept conventional terms, it may not be worth keeping them as a customer. Oftentimes after the sobering experience of checking out other options, they are happy to accept shorter terms.
• Increase your access to cash. Remmey underscored the importance of maintaining adequate access to capital. “If we’ve seen anything over the last decade, it is a lot of volatility,” he commented. Those volatile market conditions can weigh heavily on cash requirements. With lumber costs going up and up, the cash positions of companies are being impacted. It is crucial to have adequate cash reserves or a strong relationship with lenders.
• Insuring receivables. Some pallet or lumber companies mitigate the risk of longer payment terms by purchasing insurance on receivables. One pallet company looks at the risk profile of individual customers before making the decision to insure. In one case, for example, it chose to insure receivables from a company that had come out of bankruptcy. According to René Harpin of SPEC Wood, many lumber brokers and sawmills insure receivables. “It could cost a ¼% of the total sales,” he said. “There are some specifics such as the volume insured, the risk factor, the deductible too.”
• Factoring and supply chain financing. Increasingly, large customers are supporting their suppliers, including pallet companies, by helping arrange supply chain financing. According to one contact, the customer might say something to the effect that “We have a bank that we’re not affiliated with, and we won’t be making any income from it, but we can hook you up to create a supply chain financing program. For example, if the pallet company specified net 30, then the bank pays it within 30 days and deducts an interest rate to cover the cost of carrying the money. Factoring, on the other hand, is a similar approach, except it is initiated by the pallet company, which goes to a financial institution unaffiliated with the customer. The pallet company can sell the receivables to the factoring provider for cash or use the receivables to secure a revolving line of credit.
• Use pallet brokers. Selling through pallet brokers can be an attractive solution for companies that have cash flow issues. Brokers can offer net-10 or -15 terms to the pallet manufacturer while navigating the longer payment term requirements required by some buyers. For its part, FALM analyzes the risk associated with individual customers. “Based on this credit and payment risk, we’re able to establish terms and credit lines where we mitigate as much risk as possible,” the company stated. “Given our well-defined credit policy, we’re able to request pre-payments, shorter terms, hard credit lines, etc., all alternative payment terms to accepting customer requests for longer payment terms. These are trying, unprecedented times, of which FALM is able to supply pallets nationally and in pockets, especially where there are pallet shortages. In the end, FALM typically works off net 30-day terms.”
• Offer various pricing for different terms. Harpin of SPEC suggested, “I would price customers differently based on the terms. If you quote a customer who pays quickly $20 for a pallet, why not quote $21 for the customer paying at 30 days, $22 for the customer paying at 60 days. You book as much of your production with the 10- and 30-days customers. Then you work on your pricing and volumes with the others. When I have a load of lumber and I have a choice between a 10-, a 30-, a 45- and a 60-day customer, the choice is easy. If I have 50 loads to offer, I will try to book at least 50% with the best payers. Then, I will offer the opportunity to the 30-45 days to have more material if they agree to pay in 30 days.”
• Educate customers. From Remmey’s perspective, buyer education can make an important difference in getting companies to reduce their length of term demands. “We frequently get asked for extended terms, and each industry works very, very differently,” he said. Remmey’s approach is to explain to buyers that many of the mills they use, need to get paid within 10 days. It is an accepted practice that must be honored to ensure the sustainability of wood supply, especially during the current lumber shortage. When demand exceeds supply, pallet suppliers have more negotiating power in holding the line on extended terms, or even culling problem accounts.
The bottom line is that having deep pockets is more important than ever for pallet providers. Several insiders note that the capital crunch brought on by current high prices, and exasperated by payment-term demands, is playing a role in heightened pallet company merger and acquisition activity. The pallet industry landscape is changing as some operators choose to sell and get out, or others sell and remain in management roles. Now is the time to fully understand the financial options available. And most importantly, pallet companies need to recognize the power they hold in such a competitive market to just say no.
