Revisiting Vendor Payment Terms: It’s Time!

PurchTips edition #198

Are Vendor Payment Terms A Hidden Opportunity?

One effect of the recent economic recession is that banks have dramatically curtailed their lending, creating a “credit crisis.” Companies who rely on credit in order to operate have seen their cash balances dwindle.

Without cash, many companies have had to dismiss significant portions of their workforces and curtail operations. These companies may have included several of your vendors or even your own organization.

Many buying organizations facing a lack of cash and restricted access to credit have chosen to unilaterally extend their payment terms with their vendors, commonly transitioning from payment within 30 days to payment within 60, or even 90, days. While this might be a smart move for companies that face a “preserve cash or die” situation, it is a strategy that could not come at a worse time for many of their cash-strapped vendors.

With banks not lending and customers not paying promptly, some of your vendors may run out of cash and become insolvent. So, extending payment terms as a cash flow solution may cause the even more costly problem of having key vendors driven out of business.

As such, only unilaterally extend payment terms if your organization is in a desperate cash situation and only for vendors strong enough to sustain the change. If your organization has a healthy cash balance, consider taking the opposite approach: shortening your payment terms.

Today, vendors are desperate for cash. After all, the banks won’t lend them cash and their other customers aren’t paying them for a long time.

By being willing to shorten your payment terms, you put yourself in a strong position to negotiate a 1 – 2% early payment discount. That can save your organization significant money. And reduced spend may be more attractive to your CFO than improved cash flow!

My advice: collaborate with your finance department to determine whether cash preservation or expense reduction is a higher priority. Then, implement a new approach to vendor payment terms that keeps vendor solvency in mind. This is a rare opportunity!

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