Tips for Optimizing Payment Terms for Suppliers and Clients

Cash flow is crucial for a successful small business, but a few simple things can interrupt the cash you have on hand. One of these is the average payment terms you maintain between your business and vendors and your business and clients.

Uneven payment terms can leave your business strapped for cash for weeks at a time, making it more difficult to pay off debts and cover last-minute expenses. If your clients pay on net-60 terms but your vendors expect payment on net-30 terms, you’re sending out money faster than it’s coming in.

For more stable cash flow, you’ll want to evaluate your accounts payable and accounts receivable and consider optimizing your payment terms.

Plan ahead for the best cash flow

The best way to optimize your small business’s accounts payable and receivable is to carefully consider payment terms ahead of time. Negotiating and agreeing on favorable terms from the beginning allows you to start off on the right foot in terms of cash flow, giving you more freedom to build a cash reserve and navigate financial hurdles.

Negotiating payment terms

New businesses sometimes find themselves with less than favorable terms initially. Your vendors might be looking for a certain period of time with on-time payments, for example, before being willing to negotiate payments terms. You might be beholden to your vendor’s standard, with limited flexibility. And, clients might expect more favorable terms from you in exchange for business.

Once your small business stabilizes and enters the growth phase, you should reexamine your payment terms and try to negotiate for better ones to optimize cash flow. Here are a few tips.

  • Improve communication: In business, communication is key to establishing a good relationship with both your vendors and clients. If your business partners know and trust you, they’re probably going to be more accepting of your requests. Good communication is also essential to negotiating payment terms. You never know if you don’t ask, so don’t be afraid to inquire with your vendors about lengthening terms once you’ve built up your reputation—just make sure to communicate clearly and honestly.
  • Make reasonable requests: Both your clients and suppliers have their own businesses and financial needs to consider. Making unreasonable requests concerning payment terms might damage your business relationships and make others unwilling to work with you in the future. Request payment term changes that your partners can reasonably accommodate.
  • Find mutually beneficial terms: When discussing payment terms with vendors, try to find solutions that are mutually beneficial. Longer payment terms and better cash flow will usually help your business grow, which can ultimately lead to more business for your vendors. Go into these conversations with a plan and rationale, so your vendor understands how the move can help them, too.
  • Offer incentives for early payment: If you’re having trouble getting customers to pay on time or aren’t able to negotiate for a shorter payment term, you might still be able to improve cash flow by encouraging clients to pay early through incentives. Early payment discounts can help bring in payments even sooner than a shorter payment term would.

If your small business needs additional help managing cash flow, a loan or other form of cash injection may help your business reach stability. For example, a business line of credit might work for you. Or, you might consider injecting capital into your business by doing a 401(k) or IRA Rollover, often also called a Self-Directed IRA or ROBS (Rollover as a Business Startup). While the word Startup is in the name of this funding source, even established businesses can use qualified pre-tax retirement funds to access additional working capital for your business.

Contact the team at Tenet Financial Group to learn more if you want to discuss business funding needs for a new or existing business.