Operating a business, big or small, is not an easy feat and requires a serious level of commitment in order to run as smoothly as possible. Oftentimes, CEOs are so busy networking, selling and expanding their growing business that the financial health of their start-up can suffer immensely.

It is crucial to adopt a fiscal strategy, especially now that we are experiencing financial hardship due to COVID-19 pandemic, in order to help your business prosper and thrive over time. Understanding the importance and benefits of supplier payment terms and how best to negotiate favorable conditions for your small business is vital in maintaining positive cash flow and allowing yourself a cushion, in case of financial difficulty in times or in cases of extreme emergency. This knowledge will help expand your growing empire substantially and will prepare you for the ups and downs a small business may experience over the years.

What is a supplier payment term?

A supplier payment term is an agreement between a company and its customer, where a set amount of days is allowed for payment of goods and services. This means that you can essentially put your spending on a tab, keeping cash in your pocket for as long as possible. Payment terms vary heavily from industry to industry but are exceptionally important for building good credit and establishing trust in the community.

What are the most common supplier payment terms?

The purchasing department makes the decisions regarding the conditions of the vendor payment terms. Net 30 terms are the most common option a supplier may extend to your business. Once the invoice is generated and received by the customer, you have 30 days to pay the statement in full.

Other alternatives that the supplier may offer are: Net 7, Net 10, Net 45, Net 60 and Net 90. Different industries may offer you different credit payment terms, depending on the type of goods and services being offered. For example, office and industrial supplies usually offer 30-day terms while the grocery retail market offers shorter terms, such as a few to 10-day terms, due to the goods being perishable.

Longevity of the item is a factor when considering vendor payment terms, so industries such as sporting goods retailers may be offered with much longer terms, ranging from 6-9 months. 

Depending on your payment history and credibility, you can even negotiate terms with the supplier that better suit your spending needs. 

How supplier payment terms affect working capital and cash flow

Working capital and cash flow are terms that every business owner should be familiar with, as they determine the financial stability of your company and your potential future growth.

The working capital of a company represents the discrepancy between the current assets and liabilities. The money left over symbolizes the cash currently in the company’s possession, used primarily to keep it running. These are referred to as short-term expenses and are necessary to pay essential bills.

Cash flow, on the other hand, is a set amount of money that is constantly being deposited and withdrawn from the company. Supplier payment terms impact your cash flow, as money stays in your pocket for as long as possible after purchase, giving you time to make that income back, thus creating a positive cash flow. Receiving revenue for inventory sold before paying back your supplier will free up cash flow, keeping money in your pocket for as long as possible which is especially helpful in these unusual, post global pandemic times. Alternatively, positive cash flow due to longer supplier payment term conditions, can help pay for everyday expenses to keep your business running. This includes settling debts, acquiring more inventory stock and reinvesting the money back into your business, expanding your growth exponentially.

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Why you should always be negotiating payment terms with suppliers

Depending on the age and size of your business, you may feel that negotiating favorable payment terms with vendors can be challenging, especially in these unprecedented times. Due to the international spread of COVID-19, major retailers have been forced to shut down or change their policies, in order to stay afloat. Ross Stores Inc has extended their vendor payment terms on all existing merchandise to 90-days, to help customers pay back their dues in a timely manner during a very sensitive time. Similarly, the 3M Company has extended their repayment terms to 90-days as well, from their usual 60-day term, though they claim that (besides assisting customers with COVID-19 related financial issues, they are trying to compete with market trends, allowing for longer payment terms.  

Negotiating with vendors may be challenging, due to a lack of trust between your small business and the supplier. If there is no credit or purchase history associated with your account, the other party may feel a reluctance to trust you on word alone. Payment terms are established over time, when orders are made frequently, and invoices are paid in full and in a timely manner. This practice takes time and can be frustrating, especially when your business is new and still small, as every dollar should stay in your pocket in case of emergencies. However, this is a necessary task, in order for the supplier to feel confident in your payment abilities and treat you favorably.

Once that trust is established, you can begin to negotiate payment terms, which will suit your business’s needs. It is vital to know where you stand with a supplier, especially when negotiating vendor payment terms. As larger suppliers have a bigger clientele base, they may be reluctant to provide an adequate payment term, as they can allow themselves to pick and choose their customers. If a longer payment term is not something that is relevant in your situation, it may be in your (and your small business’s best interest) to ask if the supplier has an incentive program for early payment or payments made in cash. These incentives can take the form of a point system or free product with purchase. This can also be a discount for future goods and services from said supplier or a rebate/cash back program.

How commercial credit score impact your supplier payment terms

Similar to a personal credit score, which tracks your purchase and repayment history, a business can have its own credit reports & scores, also known as commercial credit scores, indicating how likely your business is to repay debt in a timely manner. Many times, banks, suppliers and investors will utilize your company’s credit score and use it as a gauge of how often you repay loans, how credible you really are and the investment potential of your company.

When looking for financing, banks and online lenders will inspect your commercial credit score. Their willingness to lend, the amount they end up lending and the interest rate you will be required to pay all depends on your commercial credit score. The higher the score, the more enthusiasm you will experience from banks. Same concept applies to investors. A smart investor will never lend their own assets to a failing company or one with anything less than excellent in the credit score department. 

Both working capital and cash flow are impacted when dealing with supplier payment terms. Firstly, obtaining a payment term with a vendor is a much simpler process, in comparison to obtaining a bank loan. This is especially true when you have an excellent commercial credit score. A longer payment term portrays a financially stable and trustworthy company, which reflects on you as a small business owner. 

Suppliers will check your commercial credit score before extending any credit to your company. Your score may also indicate whether or not you will be able to get a supplier payment term. A poor score will reflect negatively on your ability to pay back debt, so vendors will require payment upfront, interfering with your positive cash flow and affecting your business. A high credit report will indicate a good history of repayment practices and suppliers will extend longer payment terms to your business, helping you keep cash in your pocket for longer. An excellent report will make all the difference between paying upfront for goods and services or having a Net 60 term or even longer.

A good commercial credit score will also allow for a higher credit limit on your company credit card as well, which allows the business to make larger purchases to enhance their growth potential. 

When applying for insurance, your payments will also be heavily affected by a low credit score, making premium prices sky-high.

It would be helpful to find out which suppliers report directly to the business credit bureau and pay them as early as possible! Most medium and large companies will make these types of reports, but it would be in your best interest to pay as early as you can, to further increase your commercial credit score.

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The bottom line on supplier payment terms

Overall, a supplier payment term is highly beneficial for the growth and well-being of your small business, as it allows you to hold on to your cash for longer periods of time and gives you the opportunity to invest in a product and make some return on your money, before repaying the vendor. Your good commercial credit score will be directly linked to timely repayments of your loans and debts, which in turn will give you a favorable reputation with banks, investors and future suppliers.

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