Make it a win for both parties’ cash flow
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 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 to 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, and subsequently, increasing your amount of working capital. 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.
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. Moreover, the processing time can take anywhere from 24 hours to five days, which is slower than credit card payments.
Investing the time to develop 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.
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.