Extended Terms: The Good, the Bad and the Unusual

Rising interest rates have raised questions from our members about what they mean for our industry’s financing of the aftermarket’s unusual extended payment terms. In many cases, the aftermarket has much longer payment terms than identified in any other industry. While reverse factoring of extended terms was an attractive funding mechanism for many in the aftermarket in a time of historically low interest rates, higher interest rates to address inflation have created a material negative financial impact for many aftermarket suppliers. 
 
In 2012-2013, MEMA Aftermarket Suppliers worked with KPMG to conduct an in-depth analysis of the costs, benefits and risks of extended payment terms and reverse factoring for the aftermarket and the supplier community.  
 
One of the key takeaways – which we have heard echoed by customers of late – is that, given our industry’s unique model, interest rates should be considered just another cost factor. In the near-term, its impact is no different from rises in other input or commodity costs, like steel or oil.  
 
Coming out of the study, ArentFox Schiff, our general counsel, provided draft contract language that suppliers may consider. You can review this contract language as you consider how to work with your customers in dealing with the increasing costs of financing our industry’s extended payment terms. Please keep in mind that payment terms are the subject of specific negotiations between suppliers and their customers. Every supplier must make an independent decision about the terms that it will use with particular customers. Nothing in our analysis should be construed as a suggestion that suppliers use identical or similar terms of sale. No agreement among or between suppliers as to terms of sale will be tolerated