How to negotiate payment terms with your suppliers

Little wonder, then, that in order to deal with rising energy and fuel costs, high inflation and a recession on the cards, many small and medium-sized enterprises (SMEs) are looking to improve their payment terms in order to keep their businesses running.

In this article, we talk about how you can negotiate payment terms with your suppliers.

Here’s what we cover:

• Managing cash flow by negotiating payment terms
• Terms on an invoice to be aware of
• Pay early… or pay later
• Cash flow challenges
• Why negotiating payment terms can help
• How to negotiate payment terms
• Final thoughts on negotiating payment terms

Managing cash flow by negotiating payment terms

Managing your cash flow well at this time is really important. After all, you need to ensure you’re able to pay your suppliers and keep your business moving.

One key way to do that and keep your head above water is to negotiate payment terms.

This is essentially how and when you pay the companies that supply you, in particular the amount of time that you have in which to pay.

This process normally begins when you put in an order.

For most orders, especially where small items are concerned, you just pay the full amount up front. But in other cases, you’ll have days, weeks or even months before you have to pay.

If the item has to be specially created for you, and it’s more expensive, you’ll probably pay in installments. This might start with a deposit, followed by further payments before the final amount is paid on delivery.

Most companies have standard terms that their clients don’t bother to negotiate. But, in these difficult times in particular, it’s worth studying them.

Think about how you might be able to negotiate a better deal for yourself, with more time before you have to make part or full payment.

Terms on an invoice to be aware of

To check when and how much you’ve got to pay, look at the terms stated on an invoice. Here are some examples:

• PIA stands for Payment In Advance.
• Net 7 means payment is required seven days after the invoice date.
• Net 10 means payment 10 days after the invoice date.
• COD stands for Cash on Delivery.
• EOM means End of the Month.

Pay early… or pay later

In some cases, suppliers will offer a discount for payment that is ahead of the agreed date, so it’s worth making this offer.

Since the impact of the pandemic, an increasing amount of people have seen invoices being paid at later dates.

On the other hand, though, you can negotiate with suppliers to pay later, spreading your expenditure and helping with cash flow.

Cash flow challenges

Cash flow is currently under strain as incomes fall, especially in the retail, hospitality, travel and health and fitness sectors.

Although online sales have been buoyant, those with a strong brick and mortar presence have also really felt the pinch.

Alongside this, some suppliers, facing their own challenges, have increased their prices.

Added costs, affecting cash flow as well, include slow production lines due to social distances and staff absence caused by self-isolation.

With supply, production and sales all being hammered, it’s hardly surprising that profits and, particularly in the short term, cash flow have also suffered.

Why negotiating payment terms can help

Negotiating better payment terms means you can keep more cash in your business and improve liquidity, so you’ll be in a better place to pay bills and avoid having to go overdrawn or seek loans.

Better cash flow can also mean a better credit rating.

It reduces your risk, too.

If you’ve paid 100% up front for a product or service and the supplier goes under, you’ve lost out unless you have some type of insurance.

Paying minimum installments before delivery gives you more leverage if, for instance, you want changes to a product that is being designed or created especially for you.

How to negotiate payment terms

There are a number of ways in which you can negotiate better a better deal on the time you have to pay.

Prioritize who you negotiate with

Don’t try to negotiate with every supplier at once.

Not only will this be too time-consuming and distracting when you should be focusing on your business, but you’ll be able to learn from each negotiation and apply those lessons to the next one.

Start the process by prioritizing suppliers.

Who do you spend most money with? Identifying these companies is a useful exercise in itself because it’s a good way of checking to see if there are alternative suppliers who could give you a better deal.

If you do find that you spend quite a considerable sum with one company, you’ll be in a better position to negotiate with them about amending and extending your time in which you have to pay.

Set payment arrangements early

It’s a good idea to make payment arrangements part of the negotiations with a new supplier alongside price and delivery timescales, rather than just accepting their terms.

Larger companies are normally in a better position to agree to longer payment periods, partly because of their scale, but also because they’re more likely to have 90- or 120-day terms themselves.

Whoever you’re talking to, be clear that you just want to help with your cash flow and, assuming this is the case, reassure the other side that you’re not in financial difficulties.

Be honest

One important question that any company that supplies you with products and services might ask is: “Why should I do this?” Or “what’s in it for me?”.

Simply threatening to use an alternative will obviously not improve the relationship.

Instead, you can explain honestly that you’re looking to help your cash flow but also point out that you might, as a result, be able to spend more with them.

You could also offer to promote them to other companies and potential new clients through your professional networks.

Is there a contractual arrangement that you could negotiate whereby you commit to making a given number of purchases or spending a certain sum with them over a certain term in return for a longer period in which to pay?

Compromise

As with any negotiation, be prepared to compromise.

You might, for instance, ask to increase your normal 30-day payment terms to 90 days but end up doing on a deal on 45 days.

Do your research

Carry out some research into the typical timescales for invoice settlement in the sector that your supplier operates in.

Knowing the average for the sector and being able to compare it to your offer is not only persuasive, but makes clear that you’re serious about your negotiation.

Making sure you’re briefed on your supplier’s business sector generally – the challenges, average profitability and typical working practices – will not only flatter your supplier but will help you to identify ways in which you could help them as a compensation for longer payment terms.

Once you’ve agreed a longer timescale for payments, ensure you do comply with it by arranging a reminder or setting up an automatic payment.

If a supplier has agreed to give you more time to pay, any late or missed payments will provoke ill feeling.

Final thoughts on negotiating payment terms

As with almost every aspect of business, communication is key. Finding the right person to talk to at a supplier, speaking their language and knowing what their pain points are is essential.

Make it clear that you’re rolling out this review of when invoices are paid across all of your suppliers, and reassure them that they’re not being singled out.

Offer to help them in return for their cooperation if you can.

Remind them that this is standard practice, and put it into context by mentioning when you last had a review – if at all.

Choose the right medium of communication – a phone call might work better than an email out of the blue. And don’t forget to follow up in writing, of course, with the details.

Invite a response and make it clear that you want to have an honest and open conversation.

Renegotiating your payment terms requires research and preparation, and you’ll have to be ready to negotiate over days or weeks.

However, the reward in terms of your company’s cash flow, profitability and resilience will make it a worthwhile exercise.

Editor’s note: This article was first published in July 2020 on Sage Advice UK, and has been updated for relevance.