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Small and medium-sized businesses (SMEs) are often described as the backbone of the South African economy, accounting for 90% of all businesses and up to 60% of employment.

It’s no surprise, then, that in order to deal with rising energy and fuel costs, high inflation, and the prospect of a recession, many businesses are looking to improve their payment terms.

This article discusses how to negotiate payment terms with your suppliers.

Here’s what we cover:

Rising costs put pressure on businesses

The last few years have undoubtedly been difficult for businesses.

From dealing with loadshedding to pandemic-related uncertainty, business resilience has been front and centre for companies across the country.

However, there is more uncertainty on the horizon in the form of a cost-of-living crisis.

Fuel prices are still high, and energy bills are expected to rise again.

Food prices are rising, inflation is high, interest rates are increasing, and the risk of recession is still very real

Indeed, these are trying times.

Download your free copy of controlling your cashflow guide

Negotiating payment terms to manage cash flow

It is critical to manage your cash flow effectively. After all, you must ensure that you can pay your suppliers and keep your business running.

One important way to do so while keeping your head above water is to negotiate payment terms.

This is essentially how and when you pay the companies that supply you, specifically how much time you have to pay.

This process usually starts when you place an order.

Most orders, especially those involving small items, require payment in full upfront. In other cases, however, you may have days, weeks, or even months before you must pay.

If the item must be custom-made and is more expensive, you will most likely pay in instalments. This could begin with a deposit, followed by additional payments, until the final amount is paid upon delivery.

Most businesses have standard terms that their customers do not bother to negotiate. However, in these difficult times, it is worthwhile to study them.

Consider how you might be able to get a better deal, with more time before making a partial or full payment.

Invoice terms to be aware of

Examine the terms stated on an invoice to determine when and how much you must pay.

Here are a couple of examples:

  • PIA: 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: Cash on Delivery
  • EOM: End of the Month

Pay early… or pay later

In some cases, suppliers will offer a discount for early payment, so it’s worthwhile to make this offer.

According to Sage research, 15% of invoices are paid late in South Africa, and more than 88% of payments due to SMEs are either never made or are made so late that they’re eventually written off.

This suggests that prompt and even early payment is often appreciated.

However, you can negotiate with suppliers to pay later, spreading your expenses and assisting with cash flow.

Why negotiating payment terms can help

Negotiating better payment terms allows you to keep more cash in your business and improve liquidity, putting you in a better position to pay bills and avoid going overdrawn or seeking loans.

A higher cash flow can also indicate a higher credit rating, and it lowers your risk.

If you pay in full for a product or service and the supplier goes bankrupt, you’re out of luck unless you have insurance.

Paying the minimal amount before delivery gives you more negotiating power if, for example, you want changes made to a product that is being designed or created specifically for you.

How to negotiate payment terms

There are a number of ways in which you can negotiate a better payment deal.

Don’t try to negotiate with every supplier at once

Not only will this take too much time and be distracting when you should be focusing on your business, but you’ll be able to learn from each negotiation and apply what you’ve learned to the next one.

Begin by ranking suppliers in order of importance.

Who do you spend the most money with? Identifying these companies is a useful exercise in and of itself because it allows you to see if there are other suppliers who could provide a better deal.

If you discover that you spend a significant amount of money with one company, you will be in a better position to negotiate with them about changing and extending your payment terms.

Set payment arrangements early

Rather than simply accepting their terms, it’s a good idea to negotiate payment terms alongside price and delivery timelines with a new supplier.

Larger businesses are typically in a better position to agree to longer payment terms, partly due to their size, but also because they are more likely to have 90- or 120-day terms themselves.

Be clear with whomever you’re speaking to that you want to ease pressure on your cash flow and, assuming this is the case, reassure the other party that you’re not in financial trouble.

Honesty is the best policy

“Why should I do this?” is an important question that any company that provides you with products and services may ask. Alternatively, “what’s in it for me?”

Clearly, simply threatening to use an alternative supplier will not improve the relationship.

Instead, you can explain honestly that you’re looking to improve your cash flow while also mentioning that you might be able to spend more time with them as a result.

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

Is there a contractual arrangement you could work out where you commit to making a certain number of purchases or spending a certain amount with them over a certain term in exchange for a longer payment period?

As with any negotiation, be prepared to compromise.

For example, you might ask to extend your standard 30-day payment terms to 90 days but end up agreeing to a 45-day deal.

Do your research

Research the typical timeframes for invoice settlement in the industry in which your supplier operates.

Knowing the industry average and being able to compare it to your offer is not only persuasive, but it also shows that you are serious about your negotiation.

Making sure you’re informed about your supplier’s business sector in general—the challenges, average profitability, and typical working practices—will not only flatter your supplier but will also help you identify ways in which you can assist them in exchange for longer payment terms.

Once you’ve agreed on a longer payment schedule, make sure you stick to it by scheduling a reminder or setting up an automatic payment in your accounting software.

If you have agreed to give a supplier more time to pay, any late or missed payments will cause friction.

Final thoughts on negotiating payment terms

Communication is essential in almost every aspect of business. Finding the right person to speak with at a supplier, speaking their language, and understanding their pain points are critical.

Make it clear that you’ll be implementing this review of when invoices are paid across all of your suppliers, and assure them that they won’t be singled out.

If you can, offer to assist them in exchange for their cooperation.

Remind them that this is standard procedure, and put it in context by mentioning when your last review was, if ever.

Choose the appropriate method of communication—a phone call may be more effective than an unexpected email. And, of course, don’t forget to follow up in writing with the details.

Invite a response and make it clear that you want an open and honest discussion.

Renegotiating your payment terms necessitates research and preparation, and you must be prepared to negotiate over several days or weeks.

However, the benefits to your company’s cash flow, profitability, and resilience will make it worthwhile.

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