The practice of extending payment times to suppliers and using them as a funding source to fuel growth is described in today’s Wall Street Journal article, Firms Pinch Payments to Suppliers. Procter and Gamble, which till now was paying suppliers within a relatively quick 45 days, has decided to jump on the “supplier as banker” bandwagon, as many other large companies (such as Wal-Mart and JC Penney) have done. P&G is positioning this move as a win-win for them and for suppliers. They are even offering help by working out programs with banks to give suppliers cash advances on their receivables, but at a cost to suppliers, of course.

In 2009, in the middle of the recession, Robert Handfield wrote an article in the Wall Street Journal, “United They’ll Stand,” and promoted the idea of working with financially-stressed key suppliers to avoid pushing them over the brink into insolvency. The author was not advocating bailing them out but rather advocated several measures to help suppliers get through these difficult times — ways that are also favorable to the customer firm.

Handfield’s article pointed out that should critical suppliers fail, the ripple effect can end up costing the buying company far more than it anticipates, potentially millions of dollars in service failures and bankruptcies that could adversely impact the customer company. To avoid these catastrophes, Handfield suggested, for example, giving suppliers shorter payment terms. In stretching out payments to help their own cash flow, customer firms appear to suppliers that they are using them as a bank. In return for quicker payment, the buying firm should ask for better pricing. Customers could give reputable suppliers longer-term, fixed contracts with more favorable pricing linked to agreed-upon market indices, suggests Handfield. This could give the supplier the opportunity to stabilize and get additional lines of credit. Suppliers may be willing to give on pricing in exchange for long-term stability. Handfield makes a number of other suggestions, such as the buying firm not only having its own contingency plans in place and identifying alternate sources, but working with key suppliers to do the same (and of course, choosing the suppliers that you work with in this way very carefully).

Handfield was advocating that customers work as a team with key suppliers on creative ways to make it through tough economic times with both sides giving up to get something in return. Critical supplier failures are the outcome to be avoided. This requires communication, give and take, and creativity. Working with key suppliers in this way is not done just out of the goodness of your heart. The commitment and loyalty engendered by working with suppliers during tough times will pay off financially.

I have personally seen and been the recipient of the philosophy of stretched out payment terms to support the customer’s financials. Those suppliers that can withstand this practice in the short-term will be gone (if not gone, as in bankrupt) as soon as they are able to find customers with reasonable payment terms and performance. I have also worked hard to “go the extra mile” for a customer who paid quickly and to win more contracts from them. Companies that have reasonable payment terms engender supplier loyalty. T.J. Maxx, for example, had a practice of paying suppliers quickly as a way to get the best fashion brands to sell them their excess inventory.

Using suppliers as bankers can get firms out of financial jams in the short term. And now it’s a strategy to fund long-term growth. Will suppliers find other ways to get the money back, such as raising their prices? Will it be sustainable as a long-term practice? In a world of supply chain risks, it is not smart to put your suppliers out of business.