This is the third post in a series about the power of a buyer. In this situation we will be talking not about the pricing of a product, but negotiation. Specifically, we are talking about negotiating payment terms.
I think payment terms are another underestimated tool that a buyer can use to help out the company’s bottom line.
There are a lot of payment terms that are used but here are a couple common ones:
- 2% / Net 10 – If you pay by the 10th, you can take a 2% discount
- Net 30 – You have 30 days to pay the bill
- COD – Must pay up front
Obviously there are many more potential terms, but these are just some examples.
Now, lets say you currently buy raw materials from a vendor and use Net 30 terms. That is pretty standard. What you should try to do is negotiate something that benefits you more. If you have no financial problems, or extra cash, it might be a good idea to go for a 1 or 2 percent early pay discount. This could really benefit both parties, especially if your vendor is cash strapped. They might be willing to give you a small discount in order to get immediate cash-flow. This also has the added bonus of strengthening your relationship with your vendor.
Another direction you can go is to negotiate into a longer pay time. If you can move from Net 30 to Net 60 or Net 90…well, you just earned yourself extra interest money from the bank! This also would be ideal if you have negative cash-flow and need more time to make a payment without them sending the accounting police after you. (negative cash-flow not reccomended!)
In order to negotiate better terms (or pricing…or anything) you have to have some sort of edge. In most cases, in the purchasing department, this means you either have another supplier you could buy from or you have vastly increased your purchases from the original supplier. I have found that the better relationship I can develop with my supplier, the more willing they are to extend my terms…especially if I have increased my purchases from them. At that point its pretty easy to just ask them to extend your terms because of the level of purchases you have been making.
I would recommend that you take a good look at the payment terms that you currently have with your suppliers. Review them once a year. See what you can negotiate…you have nothing to lose…and extra cash-flow to gain!
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