The good news? You have a massive customer who drives a large portion of your revenue. The bad news? That customer knows how much you depend on them and is trying to extend their payment terms to a point that could seriously disrupt your cash flow.
This happens often, especially when it comes to large companies. Proctor and Gamble recently extended their payable schedule from 45 days to 75. Wal-Mart is notorious for demanding net-60 and even net-never payment schedules from even the smallest of suppliers.
So, what do you do? You need the customer’s business, but you can’t afford to not have the cash for three months. You’ll have little-to-no working capital and your business could be operating on the brink.
The first thing to remember is that you don’t have to accept the customer’s request. Just because they’re your biggest customer doesn’t mean they have the right to put your business in jeopardy.
Consider whether their business is really worth it. If it is, then you’ll have to find a workable solution.
How to Manage Big Vendor Payment Schedules
Here are a few tips to keep in mind:
The customer chose your product or service because they could see value in it. Your customer wants longer payment terms, but they also probably don’t want to lose your products. They don’t want to find a new supplier. Remember that. You do have some leverage to bring to the negotiating table.
Know their business and how you fit in.
While it’s important to respect yourself, it’s also important to know where you stand in the customer’s eyes. Do your products play an important role in their success? Or is your product a commodity, like paper clips or copy toner? If you’re offering a commodity, you have much less leverage than if you’re providing a strategic product or service.
Communicate with the right people.
The calls for longer payment terms are probably being driven by your customer’s accounts payable department. If possible, try to negotiate with the procurement team, not accounts payable.
Accounts payable staff come from accounting backgrounds. They only care about one thing – improving cash flow. The procurement team, on the other hand, look at your product differently. They’re probably the ones who chose you as a supplier. They understand the value you bring. Get them involved in the conversation and you may have much better luck.
Know their history.
Go through the customer’s payment history before you enter into negotiations. If they’ve been on net-30 and have paid 15 days early every month, then maybe an extension isn’t so bad. A shift to net-60 may just mean getting paid at day 45.
However, if they consistently pay two weeks late, you may want to tread cautiously. A change to net-60 could mean that you’ll get paid on day 75. Also, mention that they already pay you late.
Incentivize them to pay early.
If your customer is determined to pay later, try giving them an incentive to pay early. For example, you could knock two percent off their bill if they pay 10 days before the due date.
You may not want to offer this unless you have no other options, though. If they’re your largest customer, they’re probably already getting preferred pricing at low margins. If you give them too big of a discount, it may not even be worth the business.
Bring in a third party.
A good compromise may be to use an invoice factoring company to help ease the cash flow. A factoring company advances you a portion of your receivables. They then collect the invoice from the customer. Once the factoring company collects, they keep a small fee and then forward you the balance.
In this situation, receivable factoring could be a very effective solution. Your customer gets the net-60 or net-90 terms that they want. You get most of your cash upfront, so you have plenty of working capital at all times, and your operations aren’t negatively impacted. A factoring company could be a great way to make sure everybody wins.
As you expand and pick up larger clients, you’ll run into this more and more. Don’t dismiss these requests right off the bat. Rather, consider them and look for ways in which both you and your customer can benefit. They’ll likely appreciate your flexibility and your collaborative approach. That could win you more business in the future.