Your vendors supply your business with the essential goods and raw materials you need to maintain operations. While you want to protect these important business relationships, you also want to ensure you aren't paying more for your vendor services than is necessary. Negotiation of payment terms with vendors is part of any savvy business owner's job.
If you don't feel confident in your negotiation skills, this may be a daunting prospect. Don't worry. It's perfectly normal, acceptable, and even expected to discuss payment terms with vendors. They will be used to some back and forth. This guide explains how to negotiate payment terms professionally and effectively.
Why Negotiate (or Renegotiate) Vendor Payment Terms?
Cutting vendor costs will lower your overall operating costs, helping to improve cash flow (the money that cycles through your business). As a business owner, you want to keep strict oversight of your cash flow. Oversight ensures you always have the money in the bank on hand to cover basic operating expenses, like employee wages.
Whether you are negotiating with a new vendor or renegotiating with an existing vendor, you want to secure favorable terms. Don't settle on the first offer you get. Haggling is part of the process when finding suppliers. That doesn't mean the cheapest offer will necessarily be the best. However, it's good to gauge the market based on multiple offers.
So, what can you ask for when negotiating payment terms? For example, a supplier may be willing to cut you a deal on bulk orders or regularly recurring orders that consistently occur on a daily, weekly, or monthly basis. This regularity guarantees a steady stream of business for them, which is worth accommodating.
You also might be able to renegotiate the payment terms instead of the price—such as what type of payment you can use or how much time you have to pay a vendor invoice. Simply extending a payment deadline with repercussions of late fees can give you more financial freedom and flexibility as a business owner.
Negotiation of payment terms isn't just something to do with new vendors. It's perfectly acceptable to talk to existing vendors about changing terms. In addition, negotiation is often the easiest route. If you've established a reliable business relationship and the vendor knows they can trust you for prompt payment, they may be more flexible with their terms than they would be with a new client.
Tips for Negotiating Payment Terms With Vendors
Never negotiated with vendors before? No problem. Trust the below tips to guide you through the process of negotiating better payment terms.
Identify the Suppliers Worth Talking to
Don't simply negotiate with vendors just for the sake of it. Instead, make a list of all of your suppliers and see where you're spending the most money. Also, make a note of details like how long you've had a business relationship with each one, how frequently you order from them, and how much you generally order in terms of quantity/cost.
Use this information to approach vendors. For example, if you're aware that a vendor's direct competitor offers lower pricing, you may want to check whether they're willing to budge on price. Also, consider your past relationship: For example, if a vendor cut you a deal during the coronavirus pandemic by allowing partial payments, they may be more flexible in general.
Make Sure You're Talking to the Right Person
It's important to talk to the right person when negotiating payment plan changes with vendors. For instance, the person delivering your goods may not be the appropriate individual with which to speak. Check your initial contract to see whose name is on it for the best starting point. Alternatively, if you have a person you are regularly in contact with at the company, talk to them.
Know Your Current Terms
You can't negotiate for "better" terms if you don't know your baseline from which to negotiate. Review your vendor contract and familiarize yourself with all the details. Is the full amount expected upon delivery a contractual obligation—or was this an assumption? Are monthly payments mandated? Is there a given interest rate for late payments?
Find a Way to Make Your Proposal Mutually Beneficial
As an entrepreneur, your odds of a successful negotiation will increase if you can offer the other side some incentive to change. For example, you might offer the vendor payment upfront upon delivery to get a lower rate on your order. This kind of short-term repayment can also help your vendor maintain a positive cashflow—something that interests every business owner!
Schedule a Formal Meeting
It's important to schedule a formal negotiation meeting with your relevant vendor representative. You want to ensure they have time to sit down and talk and aren't in a stressed headspace. For example, approaching them when they're mid-delivery probably isn't smart. They will be in the midst of their workday and not eager to talk about business contracts.
Once you have the meeting set, get organized. In a single document, summarize the current terms of your contract and what you want to change. Further, write down what you're willing to offer them in exchange—the mutually beneficial terms mentioned above.
So, what should you ask for when negotiating vendor terms? It's up to you. What you ask for will depend on the vendor, the types of goods and services they provide, and your relationship with them. Whatever you ask for, aim high. The entire point of a negotiation is that you go in asking for more than you expect—and then settle for something lower (that you're still happy with).
Keep Your Cool
Negotiations can get heated. It's important to stay calm. Avoid accusatory language, maintain an even tone (don't raise your voice), and keep a relaxed posture (e.g., don't cross your arms). Focus on the end goal of reaching that mutually beneficial agreement—something that benefits both sides. You don't want to jeopardize your future with a vendor because you lose your temper.
Seal the Deal Officially
If you manage to come to a new agreement regarding payment terms with a vendor, make it official! Follow-up on the conversation in writing. In an email, recap the content of your conversation and the new terms. You should also get a formal new vendor contract created to replace the old one. A business attorney can help you with this.
Note that any new contract should include a clause specifying that any former contracts are no longer valid. Again, a lawyer can help you with the legal language. Finally, make sure both you and the vendor sign on the bottom line to make the contract valid. Then, keep a copy of the new contract in your files.
Keep Your End of the Bargain
It goes without saying that if you enter into a new contractual agreement with your vendor, you want to make sure to stick to your side of the arrangement! Update any automated payments or accounting measures as needed. The vendor showed flexibility in updating their terms, and you want to be respectful of this.
Ramp Up Your Relationships
Good relationships with vendors are critical to your business success. Maintaining strong connections, in general, will come in handy when the time comes for negotiating in the future. Use this negotiation opportunity to cement your positive business relationship. For example, you might follow up the conclusion of the new contract with a personal thank-you note to the vendor.
Track Your Vendor Expenses With Skynova
Whatever payment terms and conditions you may negotiate with your vendors or suppliers, you want to stay on top of your future payments. Skynova's accounting software will help you track expenses and invoices, allowing you to manage your cash flow accurately and efficiently. Find out how we help small business owners stay on top of your money management.
Notice to the Reader
This article is a general guideline and may not apply to your specific situation, depending on your vendors and suppliers. When it comes to accounting technologies or processes, consult a professional accountant to ensure your business aligns with relevant regulations.