If you didn’t pay a bill for four months after a contractor repaired your roof or a mechanic fixed your car, you’d expect to hear from a collection agency. But waiting 120 days before paying a bill is now standard operating procedure at Mondelez International, the snack and food company spun off by Kraft Foods last year.
Earlier this year Mondelez sent out a letter to its key suppliers explaining the new policy, saying it planned to implement the change in July. Examples of corporate bullying are hardly novel — big companies are famous for throwing their weight around to improve their own margins at the expense of their suppliers. But in a growing trend, companies try to withhold payments to their suppliers for months after a service is performed or a product delivered. Procter & Gamble recently drew flak when it started negotiating with suppliers to extend the delay in payments to 75 days, up from 45 days. Unilever has been rumbling about a similar move, and Merck has broached the subject of waiting 90 days to pay its suppliers and vendors.
But with its planned four-month delay to pay bills, Mondelez is engaging in a stunning example of one-upmanship.
You can understand why a big company might be tempted to hold off paying its suppliers. If you hold on to millions — or even billions — of dollars for an extra month or two (or four), you can put that cash to work for your own needs, or invest it and pocket whatever interest it gains. The practice gained popularity during the financial crisis of 2008, when the credit markets froze and even the titans of industry had trouble securing cash. And in an environment like today’s, in which businesses are continually scrambling to boost earnings in an uncertain economic climate, it’s an easy way to boost profits. But the economic benefits to the corporate giant don’t excuse such a greedy practice.
“It’s mean,” says Bill Dunkelberg, chief economist for the National Federation of Independent Businesses. A small company is often vulnerable because one large customer may make up the bulk of its sales, leaving it with no choice but to accept the demands of the giant company, effectively financing the customer for 120 days. Dunkelberg adds, “It’s a pain in the butt and costly for small firms that are having this happen to them.”
A Mondelez spokesperson refused to talk to me about the change but emailed a statement reading in part: “Extending our payment terms allows us to better align with industry and make sure we compete on fair grounds, while simultaneously improving transparency and predictability of payment processes.” Whatever that means. But apparently Mondelez doesn’t think the same standards should apply to it. The company tailors its terms so that customers are penalized if they don’t pay for confections within 15 days of receipt and for snacks within 25 days, an industry insider tells me.
As these practices become accepted by the broader industry, it takes a collective toll on the supply chain, particularly among small businesses. The NFIB’s July survey of 1,615 small businesses found that 30% say they are being paid more slowly, with just 2% being paid more quickly. That bleeds down the supply chain: 16% of those same small businesses admitted that they, in turn, are paying their bills more slowly. It all adds up to an unnecessary and costly drag on the economy at a time when our nation is struggling to get back on its feet.
Defenders might say it is all just part of a free-market system that will naturally set its own parameters on billing — supply and demand in the simplest form. But remember, small business is the biggest driver of job creation in this country, accounting for 65% of the 15 million new jobs created between 1993 and 2009.
Maybe it’s worth pointing out that, in the long run, big businesses are only as healthy as their supply chains. And in businesses big or small, you usually get what you pay for.
Becky Quick is an anchor on CNBC’s Squawk Box.
This story is from the September 2, 2013 issue of Fortune.
