When assessing a customer's ability to pay on terms, the credit team relies on a number of sources, including complex scoring models, financial, bank and trade references, Internet searches and social media. Despite the increasingly thorough and detailed credit evaluation process, since the credit crunch of 2008, vendors across the country have seen their customers disregard the credit team's evaluation and unilaterally extend these terms to better fit their working capital and cash flow needs.
According to Sageworks' 2013 Private Company Report, private U.S. companies reported a 7.4 day increase in their average accounts-receivable days (37.9 days--45.3 days) in the last year alone. With this term pushback strategy (TPS) being employed by financially-sound and financially-strained customers alike, the "new normal" for the credit team appears to be customers dictating credit terms to vendors. While pushing back on terms presents customers a less-expensive financing option and improves their working capital (as well as a best practice according to the customer's finance team), the TPS negatively affects a vendor's DSO and cash flow. How can vendors keep the customers within terms in the face of a customer's TPS? Can the Federal Antitrust law, the Robinson-Patman Act (RPA), be used as leverage against a TPS?
The RPA amended Section 2 of the Clayton Act and, among other things, makes it illegal for vendors to extend more favorable prices and/or terms to one customer without extending comparable prices and terms to all similarly-situated customers. The RPA has historically been applied to small vendors who grant discriminatory prices and terms to customers in hopes of receiving orders over larger competitors. The RPA bars discriminatory pricing and extended terms (as well as vendor concessions such as credits, rebates, promotional allowances and early pay discounts) amongst like, competing customers. If two customers meet the following factors, they may fall under the purview of the RPA's like-customer evaluation:
- The customer's functional level (Wholesaler? Retailer?);
- The type of product the customer purchases (i.e. grade and quality);
- The quantity of that product the customer purchases; and
- The geographic region in which the customer does business (the respective customer's sales territories must overlap).
However, if two customers do not directly compete, then the vendor does not violate RPA by offering a customer more favorable pricing and terms.
How may the vendor use the RPA so they themselves push back from the customer's TPS? If another customer occupies the same like-class of RPA factors above, the vendor may use the RPA to push back on the customer's TPS. The credit team may respond to the customer's TPS with: "We would like to accommodate extended terms, but the RPA prevents us. You are classed with customers who are granted normal terms."
The credit team's response to the customer's TPS attempts to bridge the gap of the customer's strategy to improve its cash flow to the detriment of the vendor's DSO. The vendor may underscore to the customer that, under the RPA, allowing a customer to set extended terms (or other vendor concessions) is no different than the vendor setting extended terms as to compliance with the like-class rule. The vendor does not have a catch-all defense to the RPA that the customer is dictating the terms of sale and therefore should be excluded from compliance with the like-class rule. Rather, the focus of compliance with the RPA's like-customer rule is whether the customer received discriminatory pricing or terms; the rule applies regardless of which party set the terms or prices. The extended terms are still the terms of the trade relationship and if they differ from the terms extended to another similarly-situated customer, the vendor has discriminated in favor of the customer setting terms.
It should be noted that RPA restrictions may not be invoked by all vendors in the face of a TPS. The RPA only covers commodities--not services. For the purposes of RPA, the following are not considered commodities: real property, brokerage services, newspaper advertising, cable television, long distance and cellular telephone service.
Likewise, the RPA only covers actual purchases; it does not cover price quotes or offers to sell. In addition, the sales in question must cross state lines in order to fall under the purview of RPA. Export sales are also outside the scope of the RPA.
Countering the Meet the Competition Exception
Consider a different setting with respect to evaluating RPA's like-customer rule and TPS:
A customer requests extended terms based on the vendor's competitor offering more favorable terms. The customer is attempting to use the vendor's competitor's extended terms offer to force the vendor to concede like terms, or lose the business. In this setting, the vendor may have no choice but to concede the extended terms if it wishes to keep that customer's business. The drafters of the RPA crafted the meet the competition concession because vendors often offer favorable terms in response to a customer's threat to change vendors in an effort to obtain more favorable pricing or terms (as set forth above). Thus, discriminatory prices and terms are lawful provided the vendor is acting to meet the lower price or extended terms of its competitor. According to the Supreme Court, the meet the competition exception balances the protectionist aspects of the RPA with the pro-competitive purposes of antitrust laws.
If the customer pushes back on price or terms in response to one of the vendor's competitors offering lower prices or extended terms, the customer may nullify the vendor's RPA-based argument against extended terms. Having said that, the vendor is under no legal obligation to meet the competition and can decline to provide extended terms, but risk losing the customer to a competitor.
According to Credit Today, the credit team's best practice when faced with a customer's meet the competition demand is to have the customer pledge that they have received more favorable terms or pricing from a competitor. The customer's pledge should disclose the competitor's product(s) being purchased and the terms being offered. If the customer has a better offer from a competitor, then the customer should be willing to make the competition pledge. If the customer refuses to do so, it may be a red flag that the customer does not, in fact, have a competitor's better offer. If so, the vendor may then use the like-customer rule and advise that the RPA does not permit discriminatory pricing or terms. The RPA provides that the vendor meet a good faith requirement to justify meeting the competition. If the customer is unwilling to make the competition pledge, yet still insists the vendor make price and terms concessions, then it may be a questioned whether the vendor meets the good faith requirement of meeting the competition concession. If, on the other hand, the customer does make the competition pledge and the vendor decides to meet its competitor's terms, then the credit team keeps the pledge in its credit file to support the newly-extended terms.
Meet the Competition Pledge
The following is a letter from Credit Today that you can use to help push back against aggressive customers:
Dear [Vendor (your company)],
This letter confirms that [Competitor] has offered us a sales arrangement which includes the following terms:
Product/Service involved:______________
Terms of payment:___________________
Date of offer:________________________
Quantity of product/service involved: ___________________________________
This information is provided to allow [Vendor] to meet the offer of [Competitor].
Sincerely,
[Customer]
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