How to negotiate payment terms with customers

As a supplier, some customers may seek to negotiate longer payment terms, especially in challenging market conditions. Here are some tips on how to negotiate the best possible payment terms for your business.

Clearly communicate your payment terms

To prevent misunderstandings and disputes down the line, clearly communicate your payment terms, including due dates, payment methods, and any penalties for late payments.

On your invoices, clearly state the actual due date next to your payment terms to avoid doubt or miscalculation. For example, an invoice issued on 1st January with 30-day payment terms should include the due date of 31st January.

If you and your customer have agreed on certain payment terms - especially incentives to pay early and disincentives (penalty fees) to pay late - lay them out in the invoice, including the extent of the penalty fee and when it will be due. 

Communicate your value as a supplier

To strengthen your negotiating position, remind customers of the unique value of your business or service. Highlight your expertise, innovative approaches, and track record to justify your proposed payment terms. 

Bear in mind too that clients may not be aware of average payment terms in your industry, and sharing these may soften unrealistic expectations. Average payment terms differ by industry and shift with economic tides: for example, last year companies told Atradius they had reduced the average term from 44 to 37 days from invoicing.

So, ensure your customer is aware of the market they are operating in.

Get to know your buyer and the risks involved

Research your client's financial situation in order to assess their ability to pay on time. Focus on their operating cash flow and how their debt-to-income ratio compares with the average in their industry. You might also consider the size of your client (a small operation may be riskier), their reputation and history, and the background of their directors or managers. 

If you take out trade credit insurance with a company like Atradius, we will put in the legwork for you to assess your buyers and their creditworthiness based on factors such as the buyer’s stability, payment history, financial analysis, and broader market conditions.

Ask questions to understand your client’s motives

Find out why your client wants to negotiate payment terms, as it may affect your stance in negotiations. For example, do they have cash flow issues? Are they intending to build a long-term business relationship with you? Knowing their motivations and challenges will help you to create terms that are mutually beneficial.

Consider how much leeway you can give

While some companies will simply accept shorter terms, shortening your terms won’t always benefit you, as you may become less attractive to customers and prospects.

Shortening your terms could even give the impression that you have your own cash flow issues.

So, if your cash flow can comfortably support the average payment terms for your industry, then it may be best to follow in the footsteps of other businesses in your sector.

Offer an incentive for early payment 

If you offer a discount for early payment, it is important to clearly define what is considered early (net 20 days instead of 30, for example) and the discount the client can expect.

Reconsider disincentives

You may have late fees in your payment terms, but enforcing these may not always be beneficial. If a trusted customer is in temporary financial distress, consider negotiating on waiving the penalties in exchange for immediate payments.

Consider payment plans

If your customers have serious cash flow issues and can't pay outstanding invoices in full, develop payment plans with them so they can pay in instalments. This should be recorded in detail in a contract.

Terms should include a partial payment to be made up front. Time frames should be agreed that enable your customer to make the instalment payments, but make sure these don’t put a burden on your own cash flow.

Compromise, as long as it’s feasible for your business

As with any negotiation, be prepared to compromise.

Your customer might, for instance, ask to increase your normal 30-day payment terms to 90 days but after compromising you might meet at 45 days.

Being flexible with payment terms can strengthen customer relationships.

Flexibility can be important to strengthen and sustain customer relationships, but two-way communication is ultimately the key to achieving a positive outcome in your business negotiations.