February 2019

Want to Strengthen Your Relationship With Suppliers? Focus on Mutually Beneficial Payment Terms

5 minute read

Supplier relationship management goes beyond simply choosing accommodating suppliers that can deliver quality goods, materials and services at cost-efficient prices. As a business owner, there's good reason in doing your part to ensure your suppliers are as happy as your customers.

Suppliers not only provide resources that are critical to running your business, they also contain a wealth of knowledge, access to connections and technology. Not meeting payment expectations or requiring that payment terms are always in your favour could lead to a host of issues: increased costs, low performance, poor quality in deliverables, late shipments and a weakened working relationship.

To maintain a positive, strong relationship with your suppliers, approach payment arrangements so it's a win-win situation for both sides. Here's how you can negotiate payment terms so both parties benefit.

Make it a win for both parties

While you'd ideally like to extend payment terms for as long as possible, everyone prefers to be paid promptly. To make it a beneficial situation for everyone involved, having a transparent, open discussion about the pain points of your respective business cycles can, in fact, present a mutually beneficial solution.

If one of your trusted suppliers’ experiences gaps in cash flow in the winter and spikes in the summer, and your seasonal cash flow is the opposite, consider offering prepayment during your peak period and their low period. That way they can be guaranteed payment before deliverables. In turn, request they be open to a longer net for the times of the year when you typically experience gaps in cash flow.

You can also restructure payment terms so that you make an advance payment of a percentage due to the supplier, then pay the remaining balance after inspection upon receipt. Prepayment or advance payments are also methods for which you can ask for discounted terms.

Consider special payment terms

To save money on materials and equipment and free up cash, ask if your suppliers will extend a 2 percent cash discount if you send payment within 10 days of invoicing. This is what's known as 2/10 payment terms.

Let's say a supplier bills you $20,000 for deliverables. If you pay within 10 days, you'll receive $400 off, reducing your accounts payable to $19,600. If it's a supplier with whom you conduct regular business—$20,000 across six months of the year, for instance—that's $2,400 you'll save annually.

To keep in mind: A 2/10 payment typically requires processing via EFT or cheque. Releasing cash that quickly could negatively impact your cash flow. Another approach would be paying by credit card on a net 30 invoice within 15 days or less. If you time your payments strategically, some credit card issuers, such as American Express, can offer you up to 55 days* of unsecured credit.

Be flexible in payment methods

Presenting a variety of payment methods will ensure your suppliers are satisfied. In addition to enjoying discounts and lengthening your cash flow cycle, corporate credit card payments will also ensure reliability and security of payment as well as fraud protection.

They are also less expensive than issuing and sending out cheques. Suppliers can receive payment more speedily with credit card than through EFT, which typically takes two to five days to process. What's more, when requesting payment with credit card, funds are guaranteed, which puts the supplier at ease.

Credit card payments also trump wire transfers. Although these are relatively easy and reliable, they are far more expensive than paying or receiving payment by cheque. Depending on the amount and currency of the wire transfer, it can cost anywhere from $30 to $80 CAD, plus additional fees. What's more, the processing time can take anywhere from 24 hours to five days, which is slower than credit card payments.

Investing the time to come up with creative solutions in which you and your suppliers can benefit from payment terms will strengthen your working relationship. In turn, it'll yield long-term, lasting benefits and contribute to the growth and success of both your businesses.

* As a charge Card, the balance must always be paid in full each month in which no interest charges will apply. The interest free grace period is 28, 29, 30 or 31 days from the closing date of the current statement to the closing date of the next statement depending on the number of days in the calendar month in which the closing date occurs. The number of interest free days varies based on a variety of factors, including when charges are posted to your account, whether your account is in good standing, and the closing date of your statement