Small and medium-sized enterprises (SMEs) are often described as the backbone of the British economy, with some 99% of businesses falling into this category.
Little wonder, then, that in order to deal with the economic effects of coronavirus (COVID-19), many are looking to improve their payment terms in order to survive and flourish when the economy returns to normal.
Impact of coronavirus on businesses
A recent survey of 3,700 small businesses and self-employed people across the UK by insurance brokers Simply Business revealed that coronavirus is set to cost small business owners £11,799 on average – with 67% having been forced to close temporarily.
In April 2020, a survey by the Association of Practising Accountants (APA), which has more than 14,000 clients, revealed that more than half of owner-managed businesses in the UK would run out of cash in 12 weeks, due to lockdown.
Figures from a survey by the Institute of Chartered Accountants in England and Wales (ICAEW) show that SMEs have been taking action to manage cash flow and defer tax payments where possible in order to keep afloat.
ICAEW discovered that 91% per cent of firms had taken the 2020/21 business rates holiday available to retail, hospitality and leisure businesses and nurseries, while 87% had deferred VAT payments and 70% had accessed the HMRC Time to Pay scheme.
Negotiating payment terms
These initiatives will certainly help many businesses but one key way to manage cash flow and to keep your head above water in the short term is to negotiate payment terms with your suppliers.
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 instalments. 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 late
In some cases, suppliers will offer a discount for payment that is ahead of the agreed date, so it’s worth making this offer.
Some 39% of invoices sent in the UK were paid late in 2019, according to fintech business lender Market Finance, so prompt and even early payment is often appreciated.
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 bricks 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.
A survey by business support organisation Business Growth Hub, of around 2,000 businesses in Manchester in early May 2020, found that over a quarter (27.5%) of companies had no more than three months’ supply of cash.
And, worryingly, a further 20% were unsure of their cash flow time frame.
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 instalments 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.
Prioritise 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 prioritising 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 the 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.
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?
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.
A recent survey by Atradius, a credit insurance and debt collection agency, shows that in the UK companies in the agriculture and food sector are usually given an average of 14 days to settle invoices.
The longest periods for invoice payments to business to business (B2B) customers, according to respondents are in the information and communications technology (ICT) and electronics sector where payment is, on average, 27 days from invoicing.
Average timescales for paying invoices across the other sectors surveyed in the UK range from 26 days in the metals sector, to 17 days among the transport businesses, Atradius discovered.
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.
Conclusion 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.
Coronavirus and your business
We’ve gathered information and resources to help navigate this situation, including tools and webinars, to help you understand what financial support is available.