What Should I Negotiate My Net Payment Terms to Be?

We are continually excited about the insightful discussions happening within our Procurement Foundry online community. A recent conversation inside the Procurement Foundry illustrated that there are a lot of discrepancies with payment terms between industries. The question came up: What should you negotiate your net payment terms to be?

One of our members was hoping to get some industry information on payment terms and explained how they’ve seen a wide range (from 30 days to 180 days). They added that over the past five years, it seemed that a growing number of (usually larger) companies have been increasing their payment terms.  

These discrepancies usually span between net 30 to net 180, and some Foundry members expressed their agreement that there is, in fact, a trend that the terms are getting longer. One member even went so far as to say that “N90 is the new N60.”  

With this growing trend in mind, one has to wonder: How will changing payment terms impact procurement, and what should we be aware of when negotiating payment terms? Let’s take a look. 

Considerations When You Negotiate Payment Terms  

Any time you are making a deal, negotiating payment terms is an important—but sometimes tricky—undertaking. Among the many things you should keep in mind is that longer payment terms carry far more financial risk for the supplier.  

With this in mind, you must ask yourself: Will forcing longer payment terms inconvenience my suppliers (or worse, put them out of business)? If so, it’s time to rethink your approach and demands. Yet another issue to consider is cash flow. A vital question you need to answer before agreeing to anything is how longer payment terms will impact your cash flow.   

A good general rule of thumb is that you usually want as much time as possible to pay your suppliers. And regarding your cash flow, everyone would rather have money in their pocket than in their supplier’s wallet. That being said, you have to find a happy medium where everyone is getting their needs met and leaves the negotiating table satisfied with the conditions. 

How Late Payments Impact Vendors  

A big reason you want to negotiate terms you are confident you can meet and abide by is that you want to avoid late payments at all costs. Why? There are many reasons, the biggest among them being that paying invoices late could damage your relationship with your supplier.  

Many smaller vendors and suppliers rely on cash flow, so you have to know that if you’re under fire to pay too early due to ill-planned payment terms and you’re going to be late, there are consequences that directly impact your suppliers and leave them in a lurch, maybe worse. Do this to one, and it’s bad enough. But develop a pattern of such behavior, and you could be labeled as hard to work with. And as everyone knows, once you have a bad name in the industry, it’s not something that is soon shaken. 

Communication is Crucial to Negotiating Payment Terms  

Before you plan to negotiate, make sure you’re committed to being transparent. Supplier relationships take a great deal of effort to build, so it is crucial that you make sure you’re mindful of that trust and protect it by protecting them (suppliers).  

It’s also important to carefully review your contract and have a plan as you negotiate. Part of this plan will involve knowing exactly what you can afford to pay so that you can negotiate from there.  

While negotiating, remember to be reasonable in what you’re asking for, but go ahead and ask for more than what you absolutely need. After all, this is a business negotiation.  

Like with any aspect of business, communication is the cornerstone of success and every good outcome. Be transparent, honest, and respectful—all the while staying aware of your supplier’s needs while going to bat for your own. 

By Michael Cadieux