In the previous sections we have sought to establish the importance of trade credit as an issue warranting the attention of business ethicists. We grounded the justification of the practice in an understanding of the joint productive exercise that exists between buyer and seller and, indeed, within the supply chain. Recognising that the granting of trade credit often entails various problems and tensions, especially where the buyer possesses considerable power within the relationship, our initial exploration of the issues focused on the notion of delayed payment as a kind of broken promise, when and how a promise might be broken or amended, and the importance of an agreement being fair in the first place. The various public policy initiatives to which we referred earlier in the paper provide economy-wide stipulations or recommendations of what a generally ‘fair’ maximum payment period might look like—60 days, for example.
However, returning to an understanding of the purpose of trade credit grounded in the joint productive exercise between creditor and debtor, there are circumstances in which an arbitrarily set payment period is too long, entailing suppliers acting as quasi-banks in supplying not only goods and services but also “financial” rather than merely “operating” credit. Such a situation is most likely to occur towards the top, or consumer-facing end, of the supply chain. This element of our analysis has particular pertinence to suppliers’ relationship with B2C (business to consumer) firms such as supermarkets, which have notably high stock (inventory) turnover and tend to generate cash within a week or two of receiving supplies, particularly in food retailing. Yet not only do supermarkets tend to take longer than this to pay, but there have been recent high profile examples of supermarkets changing their policies to move payment dates further back—even though they have not been at imminent risk of bankruptcy and against a background of a continuing drive to increase stock turnover rates.
Figure 1 portrays the two elements of the maximum payment period.
Figure 1 shows the relationship between days taken from point of supply until cash is received into the supply chain and the maximum period of trade credit to be allowed. In many cases—particularly towards the bottom end of a supply chain—we would support a standard period that is considered reasonable and fair, as has been advocated in various recent policy initiatives. This would form the basis of terms of trade between companies, unless there were good reasons to vary these (see earlier comments about fair bargains and promise-keeping). However, trade credit should be constrained to the provision of “operating” credit, which dominates the standard terms where the period between supply and cash entering the supply chain is shorter than the standard terms—hence the upward sloping segment of the constraint line towards the left-hand end of the x-axis.
As an attempt to open up the topic of trade credit to ethical scrutiny, this paper has inevitably had to make some simplifications and explore some issues to only a limited extent. Thus, in spite of grounding the analysis in an understanding of the trade credit phenomenon, it might be objected that the approach is not “realistic”. This worry about a lack of “realism” might take two forms: first, that the analysis is unduly idealistic (see below); and second, that certain practical details have not been addressed. On the second point, given that this paper is a first to attempt to treat the ethics of trade credit in a systematic manner, this is not necessarily a major flaw. Our objective has been to make progress but also to lay the groundwork for future discussion. Nevertheless, we will mention some practical issues and sketch some outline responses. We will then return to the issue of “idealism”.
First, a supply chain can have many links. However, the principle argued for above remains the same. Once money enters the supply chain, it should pass quickly back along it, assuming payment has not already been made and received according to “standard” terms. If we are operating in the sloping segment of Fig. 1, once money has entered the supply chain, it should pass back promptly to unpaid suppliers, without hindrance. In the era of electronic funds transfer (EFT), this is easier to accomplish than ever before.
Second, where supply is taking place relatively close to the top of the supply chain, the analysis seems to imply that prior to setting the terms of trade regarding settlement of an invoice, the parties to the deal should forecast when cash will be received at the end of the chain. This is usually uncertain—though the degree of uncertainty will vary with the particular supply chain and the point within it at which the forecast is being made. Perhaps, though, following our analysis, there should, in principle, be no need to set a period of credit since, as explained, cash would simply be received and a share passed on promptly, back through the supply chain. It would thus appear that we are suggesting that money received is “earmarked” and must be paid the minute it is received. That might be possible in some special situations, but, being more pragmatic, a suitable alternative would be to set the credit period with some regard to the underlying business process. Thus only a short period of credit should be granted or taken when the transaction is temporally close to the ultimate receipt of cash. For example, taking the case of large supermarket groups, they would not be expected to use their buying power to gain extended credit or even “standard” credit terms, but they would be expected to be among the fastest of payers because they sell for cash (or near-cash) and have very high stock turnover (days rather than weeks). Again, though, being practical, instead of the ideal of passing on money as soon as it is received, or forecast to be received, for particular goods, a retailer could undertake to pay based on its average stock turnover period. Alternatively, closer to the ideal, different products or product categories sell more quickly than others (cf. fresh vegetables and canned vegetables, for example), so a supermarket could base its payment policies on the average stock turnover for particular classes of goods.
Third, the discussion about the sloping segment of Fig. 1 has tended to assume the provision of goods for onward sale. Similar principles would apply to raw materials or components that would be manufactured or assembled into a new product, though they might be more likely to be covered by the horizontal segment of the line. There are also purchases that are used for many different purposes (e.g. industrial fastenings in car manufacturing) or do not enter the production or distribution process but rather support them (e.g. stationery supplies). Similarly, many services have a somewhat ambivalent relationship to identifiable activities and outputs further forward along the supply chain. However, it should still, in principle, be possible to analyse the way in which a firm uses bought-in services and other goods to support its activities, whether the purchasing firm is a manufacturer, retailer or—itself—a service provider. From an understanding of the firm’s use of services in its own business, it should be possible to derive suitable measures or proxies to indicate where in Fig. 1 it is operating with a particular supplier and, in the sloping segment, whether it is using trade credit to facilitate its own sales (legitimate per this analysis) or as a more general source of finance (illegitimate).
Having addressed some of the practicalities, a more general possible objection to the analysis is that it is unduly “idealistic”, and hence not sufficiently “realistic” in what it expects companies to do. Companies will continue to purchase supplies in accordance with conventional commercial wisdom and financial advice, taking as much credit as possible, up to the point where they begin to risk adverse consequences for themselves. They will not adopt the practice advocated here, or even change in the direction implied by it (as illustrated in Fig. 1).
This is a familiar charge against normative business ethics, or indeed against any ethical analysis that finds practice wanting in some respect—though it is difficult to imagine the value of a business ethics that was never in tension with business practice (Campbell and Cowton 2015). In the context of business ethics, this often entails explicit or implicit assumptions about the way competitive markets function. In the case of trade credit, the argument that the “realities” of competition leave no room for manoeuvre, or better behaviour, might go something like this: if a business customer does not take as much free credit or a supplying company does not allow as long a credit period (either in its explicit terms of business or through enforcement of payment terms that other firms do not attempt to do), as their respective competitors, they will lose out economically and be forced to come into line—or risk bankruptcy or managerial discipline by shareholders. It should be acknowledged that it is particularly difficult for a purchasing company to be exemplary in its payment practices if its own customers are not treating it well; Higginson (1993) recounts the story of “Barry” who is being squeezed in the middle when he wants to pay his suppliers promptly. There are several responses to this.
First, not all business is always as depicted above. Not all supply chains are tactically antagonistic in all respects, including payment terms; some are more co-operative for strategic instrumental reasons. The notion of “centralised supply chains” (Jonsson et al. 2013), in which first-order optimisation is sought, provides a good example of a context in which our overall analysis should be acceptable to participants. Good payment practices should be part of the terms of trade of partners in such a supply chain, or indeed in any supply chain where a more collaborative approach is being sought (Department for Business, Innovation and Skills 2014).
Second, while business and competition can be tough, some managers, at least, have some room for agency; their behaviour is influenced by market forces (they have to be taken into account), but it is not wholly determined by them. As Lucas (1998 p. 59) comments: “Economic determinism is false. The iron laws of supply and demand are not made of iron, and indicate tendencies only.” How much room for manoeuvre is available is a contingent, empirical question. However, it is not a given that at least some companies, some of the time, to some extent, cannot follow our suggestions—not least, in the case of suppliers, by debt factoring or invoice discounting (i.e. selling to a third party, at a discount) some of their invoices, rather than continuing to extend “financial” credit themselves, if that is where the problem lies.
Third, even if companies are propelled by market forces (such as the power of a major customer) into providing unreasonable terms or even financial trade credit, but cannot engage in factoring for some reason, our analysis identifies the shortcomings of such practice and invites regulatory or other system-level reform to address the issue.
Finally, not all organisations that incur trade debts are profit-seeking businesses: just as The Late Payment of Commercial Debts Regulations 2013 imply a higher standard for public sector organisations, so those—and similar—organisations might have greater potential for following the guidance implied by our analysis. It is important to remember that not all organisations are subject to the disciplines of the market. However, as noted earlier, this would involve some governmental or public sector organisations, especially in some countries, drastically changing their payment practices, which is less likely to happen during a period of austerity in public budgets.
Furthermore, again contra the charge of “idealism”, there are implications of our analysis beyond the behaviour of the creditor and debtor companies themselves. One is that companies’ payment practice should not be judged solely according to the number of days’ credit they take on average. The analysis of this paper demonstrates that a commonsense focus on days’ credit, which is how published “league tables” of payment practice are constructed, is misleading. It is almost certainly more meritorious for a manufacturer to pay in 30 days than for a supermarket to pay in 25 days, for example. Compilers of such tables might complain that they are the best that can be produced, given the data available, but if the best ranking that can be produced is misleading, it might be better not to produce it at all. Moreover, following from the argument of this paper, various improvements might be considered. For example, separate tables might be compiled for different types of companies, with the grouping designed to reflect different underlying characteristics regarding the movement of goods through the supply chain towards final product markets and the receipt of cash therein. In particular, it would be desirable to separate out companies that are likely to be operating in the sloping segment of Fig. 1. A similar point might be made about codes of practice or regulations such as those referred to earlier; at the very least, our analysis highlights the issue that, when they focus on the number of days’ credit, they are simplifying in a way that does not do justice to different commercial contexts.
Finally, although this paper is normative, in the sense of setting out an ideal and providing recommendations, it does not base its arguments primarily on the “uneasy application of some very general ethical principles”, which tends to be problematic for business ethics (Solomon 1993, p. 354, emphasis added). Rather, it grounds the analysis in an account of what trade credit is (the Initial Considerations section) and what it is for (the Fundamental Perspective section). This is one sense in which it is a relatively “realistic” analysis.