According to the Canadian Federation of Independent Business, around 34% of businesses in the country fail within the first five years of operation. This is in part because of bad choices, like poor supplier relationships, and if there’s one thing that can affect these relationships the most, it’s payment. That’s why it’s incredibly important to negotiate payment terms with suppliers.
In our experience at Bizfund, a surprising number of businesses never question the payment terms they are given. Many also assume there is no room for adjustment, which can lead to problems when cash flow issues arise. However, the reality is that most suppliers want businesses to succeed.
After all, how will they benefit if you fail? Your success keeps them in business. In today’s blog, we’re looking at how to negotiate considerably better payment terms with suppliers so that you have a better foot to stand on and your business benefits in the long run.
Understanding Standard Terms
Before you can learn how to negotiate better payment terms with suppliers, you need to understand the standard terms that often appear in contracts. Here’s a brief look at what you need to know about the most common supplier payment term agreement time ranges:
Net 30, Net 60, Net 90 Explained
Most suppliers use net payment terms, such as net 30, payment terms net 60, and net 90. With net 30, your payment is due within 30 days of you receiving the invoice and its date, while net 60 and 90 extend that window. A longer net window means your business has more breathing room to collect revenue before you need to pay supplier expenses.
However, many suppliers don’t like to grant a net 60 or 90 days because it means they have to wait longer to be paid, which keeps the ‘risk’ you pose open for longer.
Early Payment Discounts
Some suppliers will offer early payment discount structures. One of the most common types is a 2 over 10, net 30, which allows you to take a 2% discount if you pay within 10 days.
If you don’t want to take advantage of this discount, you’ll need to pay the full invoice within 30 days. Most businesses agree that these arrangements usually require high discipline in cash management and strong liquidity.
COD and Prepayment Situations
A few suppliers in Canada require cash on delivery or prepayment. These payment terms are especially popular in new relationships or in industries with tight margins. In most situations, these terms will protect the supplier and reduce your business’s flexibility.
When to Negotiate
So, when should you negotiate supplier payment terms as a small business in Canada? There are a few situations that indicate when it may be time to negotiate, and they include:
Starting a New Relationship
The easiest time to negotiate the best payment terms with your supplier is at the outset. At the beginning of your relationship, you can discuss expectations from both sides and determine how best to work together. You can also discuss flexibility and how late payments could work if they ever happen.
After Proving Payment Reliability
If you’re locked into a net 30 and you’ve proven that your business is a reliable payer, and this payment term isn’t working, you can consider negotiating.
Those who’ve proven they pay have an easier time negotiating than those who have paid late or missed payments. Usually, it’s best to negotiate once you have reliably paid for 6 to 12 months.
During Volume Increases
When your order frequency or supply increases, your value to your suppliers grows. If this is the situation you find yourself in, it could be an opportune time to negotiate.
You can approach them with the argument that the higher volume justifies an improvement in payment terms because, financially, your relationship has grown. For some suppliers, it’s reasonable to align payment structures with that new scale.
When Cash Flow Is Tight
Every business experiences cash flow issues at some point. If you expect your issues to be short-term, it might be a good idea to negotiate with suppliers. Most will appreciate that you are telling them about issues in advance rather than simply missing payments, and may be willing to negotiate short-term adjustments.
How to Approach the Conversation
Now that you know how to negotiate payment terms with suppliers, you’re likely trying to figure out how best to approach the conversation. This can be a tricky thing to do, but here are a few tips:
- Do your research first: It’s important to understand the standard payment terms in your industry so you can negotiate from a position of understanding. If your suppliers are placing you under net 15, but it’s common to have net 60 in your line of work, you can try to professionally discuss a new arrangement when the time comes.
- Be honest about your situation: If there’s one thing most suppliers appreciate, it’s clarity. So, what you need to do is be transparent about why you need to negotiate better payment terms. If your logic is that your business experiences seasonal fluctuations, tell them this. Often, they are willing to negotiate so that everyone wins.
- Propose specific terms: You mustn’t be vague about the payment terms you want. If you want to move from net 60 to net 30, be specific so you can give your suppliers something concrete to evaluate.
- Offer something in return: You would be in a better position to negotiate if you can offer something in return. For example, you could offer to commit to higher minimum orders, better forecasting visibility, or longer contracts in exchange for better terms.
What You Can Negotiate
Many businesses make the mistake of believing only invoice dates are adjustable, but the truth is, there are several supplier agreements that may offer flexibility, including these two:
Reduced Deposits
Some suppliers allow upfront deposits to be reduced, freeing up working capital before goods are delivered. For many Canadian businesses, suppliers are willing to reduce deposit percentages over time as long as you can demonstrate reliability.
Consignment Arrangements
Some industries allow for consignment arrangements. With this type of arrangement, your supplier might allow you to hold inventory and pay for it only once it is sold.
However, this type of arrangement only works when strong trust and clear reporting are evident. If you can wrangle it, you’ll significantly reduce inventory risk. It’s especially beneficial for businesses in distribution or retail environments.
Protecting the Relationship
Below are two of the best tips for protecting your relationship with suppliers when it comes to payments and negotiation:
Never Surprise Suppliers with Late Payments
You wouldn’t want to be paid late, would you? Sometimes, there is a true emergency or a valid reason for a late payment, but an unexpected late payment forces your supplier to deal with uncertainty on their end.
So, if you know a payment will be late, offer your suppliers a clear date and stick to it. This way, they can manage their payroll, financing, and inventory orders better while they wait. It can also help keep your relationship with your supplier in good standing, even though circumstances led to a bump in the road.
Be a Good Partner Overall
You’re not going to gain negotiation power by pressuring. Instead, you’ll gain it from offering consistency. Suppliers remember who increases volume steadily, who pays as agreed, and who resolves issues without creating problems.
If you can develop a record like this, you can create leverage so that when you ask for an adjustment on terms, you’re more likely to be successful.
Ask, and You May Receive When You Negotiate Payment Terms With Suppliers
You won’t know if your suppliers are willing to negotiate payment terms unless you ask. If you follow the negotiation tips outlined in this guide, you’ll have a better chance of achieving the payment terms you’re after. However, if payment term negotiations don’t go in your favour, you’re not out of options.
You can explore financing solutions with alternative lenders like Bizfund. We offer reliable merchant cash advances that can help you through when cash flow isn’t quite what you expected. You can apply here and see how much you qualify for in no time.
