Small Business: “Negotiating Payment Terms”

By Pat Meehan
March 10, 2010

In last week’s blog we determined the importance of cash flow. Without steady cash flow bills can’t be paid, payrolls can’t be met, and stress infiltrates the operation. Today, cash flow is more critical than ever before. Banks have closed credit lines, SBA is just “not making loans,” and customers are thinking twice before buying any product or service.

This just might be a good time to make some business changes in the area of payment terms for your small business. Business is the provision of a product or service in exchange for a “consideration,” being money. In the old days business might have been a trade of a product or service in exchange for a “consideration” of another product or service. This was called the “barter system.”

Today, one of the biggest frustrations of small business men and women is waiting 30, 60, 90, or even 120 days for payment from their customers. The frustration stems from feeling trapped by corporate legal documents and contracts with very demanding payment terms that are signed when becoming a vendor.

I recently took a poll on LinkedIn.com on businesses as to what their payment term waiting times were and results were as follows:

Less than 30 days - 25%
30 – 60 days - 55%
60 – 120 days - 10%
Some money upfront - 10%

What is missing from this equation: Business = Product or service traded for money? If you can’t answer this question, you are probably waiting 60 – 120 days for your money. The equation should be: Business = Product or service traded for money in a “win-win” environment based on a personal relationship.

A Fortune 500 company is not your customer. It is a person within that company who is your customer. It is a person within that company with whom you have built or have yet to build a relationship with. Shouldn’t that be called a “business relationship?” You can call it whatever you like but the relationship is with a person. The relationship is built and grows stronger through a process called “conversation.”

I know many small business owners who never talk with their customers. Everything is handled online by email and/or other electronic methods of communication. Calling the customer is unheard of and sometimes frightening because warmth is lacking in the so called, "business relationship." A customer that has no personal relationship with you will drop you for pennies on the dollar.

If you want to reduce the waiting time for your money, try one of these ideas:

1. Bypass your contact of sales orders and call an accounts payable person within that company and inquire about shorter payment terms. You might find out that there are no defined payment terms for you in your customer’s accounts payable system. Therefore, work out a shorter payment plan.

2. When proposing your product or service to a new client, you propose the payment terms: e. g. “Payable upon receipt net 10 days.” Have you ever tried this?

3. Consider offering a discount (1%, 1.5%, 2%) for immediate pay.

Everything is for sale in business today, including payment terms. The only thing lacking in your business might be the sales skills to sell alternative payment options. Give one or all of these ideas a try and you will find that your trip to the mail box will start becoming a much more rewarding experience!

“Happy days are here again!”