How to Negotiate Supplier Payment Terms

Cash flow can be a difficult issue, particularly for SMEs who’ve been hit hard during the recent pandemic. Many companies have had to rethink the way they get paid in order to manage cash flow effectively – in some cases, the goal is simply to stay afloat.

One key way to keep cash flowing is to negotiate payment terms with your suppliers. In this post, we’ll look at ways to negotiate supplier payment terms so you can keep more cash in the business and improve your liquidity.

What are supplier payment terms?

Most companies have set supplier payment terms that are written into the contract and appear on the invoice. Often, a customer may have to pay a certain amount upfront and the rest on receipt of their order. There may also be a clause that allows a customer to make a prolonged payment after receiving the goods, usually written in terms of “net” days. For example, “net 60” means the final instalment is due within 60 days of receipt of goods or invoice. Some suppliers may also offer discounts for early payments.

If no supplier payment terms are stated on the invoice, UK law sets the default term at 30 days.

Make sure you know what your supplier payment terms are. Accurate cash flow projections will help you manage your growth, taxes and keep your business running. Use a supplier payment terms calculator to estimate how much you’ll need to pay and when.

The terms on your contract may appear to have no room for negotiation, but even if this is the case, it’s still worth examining them to assess how you might be able to negotiate a better deal.

How to negotiate payment terms with suppliers

Start negotiating payment terms early. If you’re just starting out with a supplier, this is the ideal time to talk about payment arrangements, as well as price and delivery timescales. Larger companies are generally more open to negotiation because they’re more likely to be on longer payment terms themselves, (e.g., 90 or 120 days).

Here are some hints to help you negotiate payment terms:

• Prioritise who you want to negotiate payment terms with. If you spend a considerable amount of money with one supplier you should be in a better position to negotiate terms with them.

• Talk to the right person. Ask to speak to the person in charge of payments, rather than a sales rep, who’s only there to answer generic messages.

• Research whether other companies in your supplier’s industry are open to extending supplier payment terms. This could help you with negotiations and may encourage you to seek out a competitor who can offer better terms.

• Be flexible but firm. If you’re really willing to try another supplier, say so.

• When you’re negotiating payment terms, always maintain that you’re simply looking for ways to streamline your cash flow and that you’re not in financial difficulties.

How to write a letter to supplier to change payment terms

A letter to supplier to change payment terms should make clear what payment terms you’re looking for.

So, what do you need to say in your letter? Put simply, give suppliers a reason to consider extending supplier payment terms – for example, explain that doing so will ensure your customer loyalty for the long term. Or point out that you may be able to send more business their way if the terms can be extended. You could aim to negotiate contractual terms whereby you commit to purchasing a certain number of items with them in return for longer payment terms.

Also, be prepared to compromise – you may have to accept an extension of 45 days rather than the 60 days you were looking for. That’s still a win.

If you’ve never tried to negotiate payment terms, you may assume your suppliers won’t budge. Luckily, this isn’t always the case. If you’re professional and approach them in the right way, they may well offer you better supplier payment terms. And if they don’t, you’re no worse off than you were before.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.