Working Capital

9 Ways for Your Small Business to Set Payment Terms in Uncertain Times

March 31, 2021
Lily Lieberman

At times like these, it’s imperative that small to mid-sized businesses (SMBs) have a healthy amount of liquidity. Here’s how you can work with customers to ensure prompt payments and steady cash flow.

Lockdowns. Decreased demand. Supply chain uncertainties. For many businesses, the COVID-19 pandemic has brought disruption on a global scale. It’s no surprise that some companies are doing everything they can to hold onto cash, which can in turn cause cash flow problems for suppliers.

During the financial crisis of the last year, supplier invoice payment terms have trended toward two extremes. Some companies with healthy cash reserves have expedited payments to take advantage of discounts or other incentives. Grocery retailers have shortened terms in the interest of keeping their supply chains healthy. However, some companies have extended their payment terms in response to declining revenue brought on by the pandemic.

In this challenging environment that continues into 2021, it’s imperative to keep your business’s cash flow healthy so that you’ll have the working capital to continue operations. Ideally, that means getting paid as quickly as possible. At the same time, it is important that your payment terms help build and maintain good relations with your clients. 

Here are nine tips for negotiating the best terms with your customers in today’s difficult business climate.

1. Know your company’s cash flow position.

A detailed knowledge of your own cash flow position is a must for negotiating payment terms. Do your cash reserves allow you to extend trade credit if your customer requests it? Or does your current cash position mean that offering generous payment terms would jeopardize your ability to meet your own financial obligations? The better you know your cash flow position, the better able you’ll be to negotiate terms that work for you and your company.

2. Assess the customer’s credit.

Before entering into any new customer relationship, it helps to know if that customer is creditworthy. This information can help you determine the kind of payment terms or trade credit you are willing to extend. 

If possible, pull the client’s credit report. If they have a history of late payments, you may need to ask for the invoice payment in advance or at least a deposit. If their credit rating is high, you can be more confident about agreeing to more generous payment terms.

Whatever your source of information, be sure it’s up to date. COVID-19 may have had a considerable effect on a potential client’s financial position.

3. Know the standard payment terms for your industry.

Payment terms vary widely from one industry to another, so it’s in your interest to know what your customer is used to. Net 30 (payment due within 30 days) is a common standard for many businesses. In construction, where delays and change orders can be common, the average is 90 days or more. In the fashion industry, the norm varies from Net 30 to Net 60.

If you know that the standard for your business is Net 30, that gives you a baseline for negotiating the best payment terms.

Keep in mind, however, that these are not normal times. Standard payment terms may need to be adjusted to take account of special circumstances in the COVID-19 era. If customers are experiencing a decline in their own revenues, they may need — and demand — more time to pay.

4. Invoice as soon as possible and request confirmation of receipt.

Rule #1 of optimizing your cash flow is to get paid as quickly as possible. The sooner you send an invoice, the earlier you can set your due date. Requesting confirmation helps keep you in touch with the client and can show that you’re serious about receiving payment on time.

5. Consider the invoice amount.

It’s obviously easier and quicker to pay a small bill than a large one. If you’re invoicing for a small amount like $200 or less, it may make sense to make the payment term Net 10 or even due upon receipt. For larger invoices that run to tens of thousands of dollars, the customer may need more time to access the cash. In those situations, Net 60 or even Net 90 may be appropriate.

Here again, much depends on how much credit you can afford to extend and how confident you are that the customer will pay on time.

6. Offer a discount for early payment.

At a time when companies are doing their best to hold on to cash, a discount can provide an effective incentive to pay promptly. A common formula is “2/10—Net 30,” meaning payment is due within 30 days but the customer who pays within 10 days gets a 2% discount. This arrangement has advantages for both parties, as the customer saves a little money while your business gains a quick infusion of cash. Another advantage of an early payment arrangement for suppliers is it enables them to avoid taking on debt or additional leverage in order to improve cash flow. 

7. Charge late fees for overdue payments.

If discounts are the carrot, late fees are the stick. No company wants to add to its cash flow challenges by paying more than the established rate. A late fee of 1.5% or 2% is standard for overdue payments. A courteous email reminding the customer of a past-due account sends a message that you’re serious about getting paid. A delinquent account can be turned over to a collection agency, but this should be a last resort.

8. Make terms crystal clear.

Be sure that all payment details — amount, due dates, discounts, late fees, etc. — are spelled out explicitly in all contracts and invoices. This will help prevent any miscommunication and will provide documents to refer to in case any disputes arise. 

9. Communicate and work with the client.

Above all, keep the lines of communication open and be aware of financial challenges the customer may be facing. Flexibility is key to negotiating payment terms in these unpredictable times.

That doesn’t mean you have to be a pushover. If a client unilaterally announces an extension of payment terms, don’t be afraid to remind them of their contractual obligations. After all, you have your own obligations to meet. Continue negotiations in a good-faith effort to come to a mutually satisfactory agreement. Be willing to compromise, but make it clear that non-payment is unacceptable.

Looking to the future

Although negotiating payment terms may be especially challenging in the current climate, keep in mind that the pandemic won’t last forever. While you may be focused on managing your cash flow to meet your immediate needs, the long-term goal is still to establish lasting relationships with customers you can depend on for repeat business in years to come. 

Even in the pandemic era, this hasn’t changed: negotiating fair, reasonable payment terms is the first step in building trust with your long-term clients. 

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