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On March 14th 2024, 75 individuals from garment brands and manufacturers gathered virtually for the Learning and Implementation Community event. The session was part of the two-year process of this community, which meets every two months to discuss different elements of ‘Responsible Purchasing Practices’. The prime focus of the dialogue was payment terms, a crucial aspect of supply chain dynamics that has profound effects on the stability and sustainability of manufacturers. In a landscape where financial terms and transactions can make or break a manufacturing business, the event expanded on the key aspects of payment terms and their broad impacts.

During the presentations, an individual who has worked for manufacturers shared that at the pandemic's peak, extended payment terms stretched beyond 120 days, leading to widespread factory shutdowns and job losses. Although the current payment terms have since shortened, the gap between producing goods and receiving payment continues to place manufacturers in a significant struggle with high financial risks. Some manufacturers shared that they feel it is unsustainable to have payment terms of 60 or 90 days after shipping, and they are now requesting customers to pay some deposit. A manufacturer raised the issue that payment terms of nominated material suppliers are much shorter than payment terms with the brands. In order to bridge the financial gap, many manufacturers take out loans with local banks, often with high interest rates. Other manufacturers ‘sell’ their invoices to a factoring company which can be legitimate, but some unethical companies are emerging and aggressively approaching manufacturers. An insightful contribution from a business and human rights lawyer highlighted the vulnerability of small suppliers and put forth recommendations, including the need for suppliers to carefully review the liability section and jurisdiction clauses of agreements, ideally asking a lawyer to check the agreement before signing it to avoid an exploitative agreement.

In response to these challenges, a representative from the International Finance Corporation (IFC) shared about the Global Trade Supplier Finance programme, which aims to shorten payment terms to manufacturers in emerging economies, with lower fees than local banks, whilst also giving the option of linking better rates to sustainability metrics.

Whilst it is important to discuss supply chain finance, and encourage brands to set up a system with a reputable lending organisation with lower rates, it’s important to emphasise that this does not remove the responsibility of brands to work towards reducing the length of their payment terms and considering paying some proportion on deposit. This is what is really needed in the industry for it to be sustainable and to protect human rights.

One of the manufacturers made some additional recommendations for brands. It was suggested that payment terms can be adjusted according to the size and financial stability of the supplier companies. In instances where order volumes are lower than anticipated, buyers were encouraged to consider earlier payments. In their view, having a brand’s local team in place was beneficial, highlighting the value of proximity in fostering understanding and expediency.

Building on these discussions, a LIC brand showcased how these concepts are put into practice. They shared their strategy of engaging leadership and colleagues from various relevant departments through interactive workshops to deepen the understanding of the impacts of purchasing practices on suppliers and to brainstorm some positive actions. The brand doesn’t charge late delivery penalties, and shared the ways they are working to reduce penalties for quality. This includes employing a quality manager whose role is to support factories to improve their own quality checks, and if an issue is found after delivery, a full analysis would be conducted to ensure the penalties are fair.

The event highlighted a pressing need for a transformative approach to payment terms and practices in the textile industry. Fruitful discussions in break out groups, produced practical suggestions for action. Some of the ideas to balance financial risk included pre-paying for material, tracking and paying for liability fabrics and trying to use up left over fabrics by developing new products. In terms of reducing penalties for delays, the recommendations included improved communication to flag up possible delays earlier so that a solution can be found together and also, if delays are caused by the brand missing deadlines in the critical path, this should be tracked and the supplier shouldn’t be charged. The suggestions from the break out groups will be further discussed within the internal teams of the participating brands, in discussion with key suppliers, to work towards improvements.