How To Negotiate Payment Terms with Customers
Suppliers and their customers share a mutually beneficial relationship, but sometimes, the finer points of that arrangement can make it feel like the two entities are at odds.
While the customer may seek flexible payment options, the supplier will likely want to receive compensation as quickly as possible.
What’s the best way to meet in the middle?
What Are Invoice Payment Terms?
Invoice payment terms outline the parameters for how you’ll accept compensation from your customer. An article from the Australian government describes how payment terms, which are subject to contract law, may include:
- Payment methods: The invoice will specify whether cash, direct debit, a cheque or other options are considered acceptable for your business.
- Credit terms: You may decide to extend credit to your customer or not. Often, this means giving the option to complete the payment sometime between one and four weeks after invoicing.
- Debt collection: If you do not receive payment on time, these details clarify what steps you will take to ensure your business is compensated.
What Are 60-Day Payment Terms?
In the interest of maintaining an adequate amount of cash on hand to meet their operating expenses, many customers hope for better payment terms than the 28-day maximum mentioned previously. Solutions in the range of 30 days are common.
In some situations, 60-day or even 90-day payment terms may be the ideal window for certain clients.
PwC noted, beginning at the end of September 2021, large businesses in Australia will have to publicly report some details of their payment terms for small business suppliers. This will help shed light on current trends in the field.
As a supplier, you may be driven to accept a wider payment window, like 60 days, to help you land a large new account. If payment is actually submitted even later, you may experience financial strain and lose time and money attempting to collect on the debt.
Difficulties Customers Might Experience in Meeting Payment Terms
So what causes a customer to need longer payment terms? If your invoice clearly states that you’ll extend credit to your client for 30 calendar days, then what could go wrong that causes them to delay payment to your business?
- Payment errors: Accidents happen, and sometimes a specific operation or workflow may fail to execute on time for your customer. Sending a reminder about the terms stipulated in your invoice should help rectify these situations quickly.
- Working capital: Especially for a new or growing business, cash flow issues can occur. Your client may decide that accepting the consequences of a one-time late payment to their supplier will ensure they have the cash needed for ongoing operational expenses like payroll.
- External factors: As we’ve seen with the COVID-19 pandemic, unexpected circumstances can quickly lead to widespread economic consequences, including difficulty meeting payment terms. CreditorWatch reported that in the second quarter of 2020, payment times increased by 343%.
How Should You Respond When a Customer Asks for Extended Payment Terms?
Clear communication from your customer that they’ll need to extend their credit terms allows you the opportunity to collaborate with them. By talking through the issue, you’ll be able to understand more clearly what challenges your buyer may be facing, allowing you to craft a mutually beneficial solution.
That said, you shouldn’t have to run low on cash simply to support your customer. You may be able to negotiate new terms with your client to help make a one-time extension more palatable for your business. You could also explore using a “Buy Now, Pay Later” solution like UnLock to make sure your company is paid on time while expanding the options available for your customers.
The Benefits of Upfront Payment as a Supplier
For suppliers, upfront payment terms might seem like a reach, depending on your industry and your customer base. However, tools like UnLock can help you achieve the advantages of upfront payment for your business while still ensuring your clients have favourable credit terms.
What Is an Upfront Payment?
In contrast to the credit options discussed previously for business-to-business (B2B) transactions, upfront payments are completed right away. Instead of administering an invoice that specifies when compensation is due from the customer, payment may be submitted immediately, even before goods are delivered or services are rendered.
Upfront payments free up cash flow for the supplier, allowing them to assume less financial risk during the transaction.
Can a Supplier Change Payment Terms?
Since payment terms are governed by contract law, suppliers must follow legal requirements for whether and how they can alter invoice expectations.
Will Customers Be Willing To Pay Upfront?
It may be difficult for some customers to pay their suppliers upfront. They may not have the cash reserves necessary for submitting full payment until after receiving goods from their supplier and selling a finished product to their own customers.
The UnLock “Buy Now, Pay Later” solution can provide financial support for completing the transaction, eliminating obstacles that would otherwise make it too difficult for your customers to execute the payment so quickly.
Incentives for Adjusting Payment Terms
As you strive to discern how to negotiate payment terms with your customers, remember that strong supplier relationships are crucial for your clients. Incentives for prompt payment can come in the form of discounts for your customers, more highly engaged customer service and other partnership opportunities for expanding the business relationship.
Consider offering benefits that are valuable enough for your customer to consider weathering the initial cash burden of submitting at least a partial payment ahead of schedule. You may be able to encourage them to participate in more favourable payment terms for your business.
The UnLock solution can help them manage upfront payments in order to benefit from your incentives.
Strategies Customers Can Use for Negotiating Payment Terms With Suppliers
For a business owner who wants to negotiate an expanded credit window with their supplier, there are a few options to consider. Some alternatives can be implemented without changing the payment parameters.
A guide from the Business Victoria government website recommends that, as a customer, you:
- Pay regularly and on time: Monitor your processes and systems to make sure that you settle each invoice when it’s due, not early or late. This can help you avoid future cash flow issues.
- Reassess the contract: Look for opportunities to reduce costs for your business. This may come in the form of opportunities to lower your prices, leverage discounts or adjust your order schedule for a faster turnaround. If you can purchase stock later and sell it faster, this could ease the burden on your cash reserves.
- Request an adjustment from 30 to 45 days: Asking for a temporary credit extension, under limited circumstances and for a short period of time, may be sufficient for building up your available cash again.
As a buyer, using the UnLock “Buy Now, Pay Later” solution can be an effective way to expand your payment terms up to 90 days without having to negotiate with your supplier. Once your business is approved, you’ll be able to upload invoices online for prompt payment to the specified company. UnLock will simply debit you on the new due date and assess a low monthly merchant fee.
How UnLock Differs From Traditional Banks in Facilitating Expanded Payment Terms
Unlike banks, UnLock offers a streamlined solution for providing expanded credit terms related to business transactions.
We provide an exceptional customer experience for the supplier and the customer alike. After we onboard a new buyer, they can upload their invoice online. We pay suppliers quickly and collect payment directly from their client when it’s most convenient for them.
Importantly, we don’t take securities over personal property portfolios, whereas banks will often require collateral before extending credit.
Strategies for Enabling Upfront Payment
At UnLock, we can provide suitable credit solutions for large companies as well as small and medium-sized enterprises (SMEs). We help suppliers secure upfront payment even as their business partners benefit from extended payment terms on the invoice, improving the customer’s access to cash, and allowing them to meet crucial operating expenses.
Begin Using UnLock With Your Customers Today
It’s always best to work directly with your customers to find a solution that’s suitable for both parties involved. As your customer expands their company, you benefit from having a stable and reliable business partner. When you receive prompt payment, you can focus on customer service instead of on collecting debts or managing your own cash flow challenges. UnLock represents a truly beneficial solution for your and your clients alike.
If you know that your customers would stand to gain from building up their cash reserves, UnLock could be the ideal payment method for you and your clients.
Learn more about how Unlock can help you negotiate better payment terms with your customers by visiting https://unlockb2b.com/supplier/.