One of the fastest and most effective ways to improve your business cashflow is to improve payment terms with your suppliers.
There may be many reasons why you want to improve cashflow…
You could be under cashflow pressure due to longer payment terms you have set up with your customers and want set up similar terms with your suppliers so you are not constantly cashflow negative.
You could be looking to expand your business and need the extra cash to fund those plans, yet want to avoid applying for extra finance.
You may have debts that you want to pay down sooner to avoid extra interest charges.
Whatever your reasons, you will often be surprised how receptive suppliers can be to a request for better payment terms. For instance if you are currently net-30 with your suppliers maybe you can get that extended to net-45 or even net-60.
But before you jump on the phone and demand an increase to your payment terms you need to develop a plan and figure out how you will frame this proposal in a way that is mutually beneficial for you and your supplier.
Below are some simple yet very effective tips to help you develop the best possible proposal.
Develop A Strong Supplier Relationship
How strong is your current relationship with your supplier? The better they know you and your business the more receptive they’ll be to your requests. So instead of sending all your orders by email, pick up the phone and talk to your contacts within the business.
If possible arrange a face to face meeting every once in awhile and always respond to their calls, emails and other communication. Start building the relationship prior to asking for better payment terms so by the time you do ask they see you as valued, easy to deal with customer who they want to continue doing business with.
Pay Their Invoices On Time, Every Time
If you don’t pay your current invoices before they are due there is very little chance you’ll get your payment terms extended even further. No one likes chasing up overdue invoices as it cost the business time, money and resources.
This should apply to all your supplier relationships but especially if you are planning on asking for an increase in your payment terms.
Highlight How They Will Benefit
You’ll dramatically improve your chances of success if you can explain how extending your payment terms will actually benefit their business.
Maybe it will help you grow your business so you can increase your order volume. Do you have a potential opportunity to expand into higher priced products but you need the extra time to sell these more expensive items?
Taking the time to identify how this will benefit your supplier shows them that you are not just asking for a favour and that it would be a wise business decision to agree to your request. It also helps them explain the advantages of your proposal to their bosses.
Get Quotes Off Their Competitors
Before going to your current supplier you want to go to some of their competitors and see what payment terms they will offer you. This gives you some negotiating power if your initial requests is rejected. If you’re a good customer and they don’t want to lose you to a competitor having a back-up quote can be extremely powerful.
Don’t Expect Too Much
You need to have a realistic proposal for them. Take into account the size of your business compared to their other customers, your avg. order volume and industry standards before deciding what terms to ask for.
Maybe a small increase from net-30 to net-45 will be accepted but if you start asking for net-90 days it will put too much pressure on your suppliers cashflow and they’ll have to decline.
Talk To The Decision Maker
Who sets the payment term in your supplier’s business?
It’s your job to find out. Talk to your current contacts and make a point of becoming familiar with this person. Be prepared for any objections they may throw back at you and always be honest and transparent. If you know what matters most to the decision maker then you’ll be much better prepared when the time comes.
These simple tips will give you the best possible chance of improving your payment terms with suppliers. And as I mentioned earlier, if you implement all the above and still get refused be prepared to switch to a competitor who’s willing to meet your requests.