5 tips for managing credit times and improving payment terms
The credit time you give your customers and get from your suppliers is crucial to the liquidity of your business. Therefore, renegotiating your payment terms can have a major impact on your tied up capital.
You can read how great this effect is in our article “6 Tips to Improve Business Liquidity – Working Capital Management in Practice”.
A combination of increased supplier credit time and reduced customer credit time will help you get money in for sales more quickly and serve your bills more efficiently. The following five tips can help improve your payment terms.
1. Be aware of credit time
It is not uncommon for small and medium-sized companies to end up in a liquidity gap because they enter into agreements where the focus is only on the price, without taking into account how long they have to wait for settlement in relation to large payments in the business. In some cases, reducing the credit period by a few days may mean that the company has the ability to pay on payday.
Therefore, it is important that the time between when you pay your suppliers and when the payments come from your customers is as short as possible. As far as possible, you should try to get better payment terms from your suppliers than what you give your customers.
2. Don’t be too kind to customers
It is common for businesses to be afraid of doing something that can affect customer relationships in the wrong direction. This can be an underlying motive when negotiating payment terms. My experience is that companies can be too kind to their customers and grant longer credit to customers than the liquidity of the business can withstand. Historically, it has been common to set 30 days of credit as default, but there is no reason to follow this only out of old habit. According to European Payment Report 2018, Norwegian B2B customers spend on average 25 days to pay an invoice.
In such cases, it is crucial that you initiate negotiations. After all, credit time is free of charge, so you will rarely or never find your customers coming to you to request a shorter payment deadline.
3. Be transparent
In the dialogues you have with your customers, you should look for opportunities for mutual benefit and talk to your counterpart about what underlying interests you have. For example, if you end up in a period where you are experiencing pressured liquidity, it may in many cases be worthwhile to be honest with the customer about your situation. Go through the math together and show that the current conditions are jeopardizing your liquidity. See if it is possible to negotiate for other credit times against, for example, giving discounts.
Keep in mind that your customers are also part of the same ecosystem as you and that the mutual dependency between you is greater than you think. It can be a benefit to both parties that your business maintains its ability to pay.
4. Look at vendor debt
Good handling of accounts payable can be an important step in reducing the capital tied up in your business. To free up liquidity, try to extend the payment terms as much as possible.
In many cases, the credit and credit time you get from your suppliers is determined by the reputation of your business. This will be closely linked to the suppliers’ experience with the company in relation to settlement and compliance with agreements. Be an actor your suppliers can rely on and strategically use your reputation in a negotiating situation.
5. Think tactically when the strength ratio is not in your favor
Large, established companies have a strong focus on capital tied up, and use it for all that is worth in contracts and agreements. Many small businesses therefore help to finance the large ones, because they are pressured to accept longer payment times. Equally, it is possible to be tactical when interacting with actors larger than yourself:
- Ask for longer credit with suppliers for larger orders.
- Ask for collective invoices from the major suppliers.
- To achieve economies of scale, purchases can be collected from fewer suppliers. A close bond with a few players can improve your negotiating room and payment terms.
Keeping track of money on the book and estimating liquidity in the future is essential for survival, especially for smaller businesses. We’ve prepared a template for how to create a liquidity budget for your business. It allows you to estimate whether you have sufficient cash for day-to-day operations, investments, hiring more employees and the like. You can download it for free by following the link below.