Halden Packaging and a Supplier on the Edge

Cost of forgoing the discount. The standard formula: (2 / 98) x (365 / 50) = 14.9% annualized. Because Halden currently pays on day 58, the effective acceleration is only roughly 48 days, so the true cost of funds avoided is slightly lower, but the comparison is the same: 14.9% is well above Halden's 9% WACC.

Absolute value. Annual board spend with Trellis: 14,000 x 38% = 5,320 tonnes x $900 = $4,788,000. A 2% discount is $95,760 a year. The cash cost of paying 48 days earlier is roughly $4,788,000 x 48/365 x 9% = $56,700. Net benefit: about $39,000 a year.

So the discount is value-accretive on a WACC test but small in absolute terms, and it cuts directly against the CFO's $3M cash target. Paying $4.79M of invoices 48 days early consumes roughly $630,000 of working capital - the opposite of the stated objective. On a strict treasury basis, Halden should decline and keep its cash.

But the decision is not purely treasury. Trellis has 1.4x interest cover, negative free cash flow and a covenant test in five months. A supplier representing 38% of board supply is asking for help in the only language it can use - payment terms. If Trellis fails, Halden faces a five-month qualification for a replacement, 1,200 tonnes of trial material, and a 6% premium on 38% of volume, roughly $287,000 a year, plus a supply interruption it cannot absorb.

Recommendation. Do not frame this as a discount decision. Counter with a structured package: move to net 30 on a defined portion of volume, require financial reporting and a supply assurance agreement in return, and keep the remaining volume on current terms. The $39,000 discount benefit is not the point; continuity is worth many multiples of it.

Quantify the exposure. 38% of board volume is concentrated in a supplier with 1.4x interest cover and a covenant test in five months. A failure costs a five-month qualification, 1,200 tonnes of trial material, and a 6% premium on the reallocated volume - roughly $287,000 a year recurring, plus the interruption cost of a line that cannot run without board.

Assess the alternatives honestly. Full diversification is not available: the second source covers 22% at a 6% premium and cannot absorb 38% quickly. Doing nothing is a bet that Trellis passes its covenant, which the accounts do not support.

Recommendation: a two-track response, weighted toward diversification.

Track 1 - protect continuity. Negotiate a supply assurance agreement with Trellis: weekly production and inventory reporting, a right to audit, notice of any covenant breach within five working days, and a step-in or tooling-access right. If Halden provides any financial support, structure it as payment against delivered material - earlier payment or a modest prepayment secured by inventory - never as an unsecured loan. Increase the buffer stock of Trellis board to six to eight weeks, funded as insurance rather than working capital.

Track 2 - reduce concentration. Fund the second source to raise capacity toward 35-40% of volume, accept the 6% premium as a risk cost, and start qualification of a third source now. Put a firm date on when Trellis falls below 30% of supply.

What not to do. Do not buy equity or guarantee Trellis's debt. That converts a supply problem into a balance-sheet problem and puts Halden in a position where it must keep funding a failing business to protect its own line. Keep the relationship commercial and the exposure measured in weeks of supply, not in capital.

Contract protections.

• Financial covenants mirroring the lender's, with a reporting obligation and a defined remedy period.
• Supply assurance: minimum weekly output, capacity reservation for Halden's share, and priority allocation in shortage.
• Step-in rights and access to Halden-owned tooling, plates or formulations held at Trellis.
• Termination assistance: a defined notice period and continued supply during transition, priced in advance.
• Change-of-control clause, since a distressed family business may be sold and Halden's terms would not automatically survive.
• Price mechanism and quality KPIs with chargebacks, so support is not repaid with deteriorating service.
• If any prepayment is made, security over specific inventory with a right of set-off.

On the $3M cash target. The two objectives can be reconciled if the CFO sees the whole picture. Declining the 2% discount preserves about $630,000 of working capital and costs about $96,000 of discount - net positive to the cash target. Extending payment terms elsewhere is the larger lever: a one-day increase in days payable outstanding across Halden's total spend is worth more than the Trellis decision. But a blanket stretch of supplier terms across a supply base that includes a distressed supplier is how supply failures are created.

Recommendation to the CFO. Segment the supply base: stretch terms with financially strong, competitive suppliers, and hold or shorten terms with critical or fragile ones. Present the Trellis exposure as a risk cost - the 6% premium on reallocated volume is roughly $287,000 a year, roughly three times the discount forgone. Approve a targeted plan that protects the $3M target through segmented terms, not a uniform policy.