How to negotiate payment terms with clients | Allianz trade in the United States (2023)

Negotiating payment terms with customers can sometimes be a difficult equation to solve without jeopardizing your financial situation or the deal you close. A thorough analysis of your client's situation along with the relevant coverage mechanisms can help you find the sweet spot.

Important bill payment terms you should know

“Conditions of Sale” are the basic and most important terms of your contract: cost, volume, delivery, payment method and date. They must be crystal clear.

In your contract, business credit is extended as a “line of credit,” which details how payment is scheduled over time. It differs from "Pay in Advance" (PIA), which means payment before delivery, or "Pay on Delivery" (COD), which means immediate payment upon delivery.

With a credit line, the customer can negotiate a discount for early payment of the invoice or a rebate for timely payment. This type of mechanism can be very virtuous: it encourages your customer to pay quickly and generates greater long-term loyalty.

Example.A customer receives a trade credit with conditions of "5/10 net 30": If payment is made within 10 days, the customer receives a 5% discount. Otherwise the full amount will be paid within 30 days.

For longer payment terms, you can also negotiate a partial advance payment or a down payment.

What you should consider before negotiating payment terms with customers

Before negotiating payment terms and extending business loans to new or existing customers, you should do everything you can to avoid possible defaults and their impact on cash flow. It is important to define and implement a credit risk management business process that will help you fully understand your cash flow position and assess the creditworthiness of a current or potential customer.

Know your cash flow position

Providing a business loan to your customer means that you agree to shift a cash flow to your company even after the invoice has been signed and the statement captured. Therefore, you need to ensure that your cash flow position allows for this.

For this reason, a good analysis of your working capital is essential before negotiating loan terms. The accumulation of receivables can reduce your free cash flow and affect your ongoing operations and investments.

It's also helpful to check that your business has enough solid financial reserves in case customers don't pay or are reluctant to pay.

For more information on cash flow management, see our e-book,How to Protect Your Cash Flow: A Guide for Small and Medium Businessesor check out our articleHow to create a cash flow forecast.

Assess the credibility of your customer

It is also advisable to study the financial situation of your customer in order to assess his solvency. By understanding your prospect's credit risk, you'll be better informed about business lending. You can identify a current or potential customer's potential credit risk by reviewing company records from your local chamber of commerce, bank and business records, and the 10k company. This information can be used to estimate solvency in the short and medium term. In particular, you should look at operating cash flow -- the cash generated from operations -- as well as the debt-to-income ratio compared to the industry average.

You can obtain a credit report from national commercial credit bureaus detailing your customer's payment history with other companies, billing activity, and more. Some banks and companies also offer to create such credit reports. Business credit reports often include credit scores. Creditworthiness is a measure of a company's financial stability and likelihood of paying on time. Scores typically range from 1 to 100, with a score of 75 or higher being considered excellent.

Other, more objective, non-financial elements can be considered to assess your client's performance.credibilityand negotiate the appropriate payment terms:

• The size of the client: Managing a small client is typically more risky and costly in relation to its business size and financial resources.
• The useful life of the goods: If the delivered product is perishable or has a short shelf life, its mortgage lending value, which can serve as a guarantee in the event of default, decreases rapidly. Then short payment terms are preferable.

In addition to the financial aspects, it helps to know your client's reputation, your bank's reputation, their business practices, and the background of the company's top executives. The granting of commercial credit is also based on a relationship of trust.

How to negotiate the best payment terms for your business

When developing and negotiating payment terms, your first priority is to ensure that monies owed to your business for goods delivered or services provided are paid to you. To ensure positive cash flow, it is good business practice to agree on prices, payment terms and delivery expectations with potential and existing customers.

Termination of payment negotiations with a new customer

Prepare the customer contract carefully with information on delivery and payment terms. Set the expectation that the contract will be signed before any product or service is provided. To prevent the new customer from negotiating contract terms, clearly define all your payment terms in your contract:

• Payment due date:Describe your billing schedule clearly. Also refrain from vague references to payment by cash on delivery. Instead, clearly state when your bills are due, e.g. B. "Payable within 30 days of receipt". Make sure your invoices state the exact date when payment is expected.
• Offer payment motivators:Offering an early payment incentive is a positive motivator to pay before the due date. If you offer an early payment discount, clearly define what counts as an early payment (e.g. 20 days net instead of 30) and what discount the customer can expect.
• Explain late fees:Avoid expectations that late payments are acceptable by specifying how much and when a fine will be imposed. Make sure you add the same language to your invoices.

Manage payment negotiations with existing customers

At some point, you may have a customer who defaults on a payment or asks for more time to pay an invoice. Managing payment negotiations to benefit your business and retain a potentially valuable customer is a delicate process.

• Before you trade, listen:When a customer comes to you proactively about an overdue bill, or when you call your customer about an overdue bill, listen to learn about their situation. This way you will dispel any awkwardness and anger and set the stage for negotiation rather than compromise.
• Offer a payment plan:Be proactive and offer the customer a way to more easily manage their obligations to you. A payment plan can relieve stress and keep you paying.
• Commitment to due dates:If the customer asks to extend the payment from 30 to 60 days, see if a 45-day commitment would work. Then ask if this timeframe would make it easier for the customer to meet future commitments. If yes, reformulate the contractkeep relationshipand secure future cash flow.

How to ensure timely payment after trade

Once you negotiate the terms, there are several optionsensure timely payment:

• Always make sure you issue an invoice as soon as possible and ask your customer to acknowledge receipt. Write down the bill details and speak to your customer as the due date nears rather than waiting until the due date, especially for large bills. If the customer misses the payment deadline, keep the dialogue going and make sure they understand that you won't accept non-payment.
• Track late payments quickly and securely. For example, you could set up an automated dunning process to remind customers of their payment obligations.
• If the customer does not meet the payment deadlines, he can demand payment of fines and interest on the outstanding debt. However, if the customer's financial situation has already deteriorated, the penalties are just as difficult to recoup.
• As a last resort, the client's assets can serve as collateral. This guarantee can only be obtained at the end of an often lengthy and costly legal process.

Collecting arrears or interest or recovering assets is often difficult in the event of a customer's bankruptcy. By insuring your accounts receivable with trade credit insurance, you can rest assured that you will be paid even if one of your accounts receivable is outstandingAccounts before bankruptcyor can not pay.

Maintaining a long-term relationship with the customer

Behind the technical and financial aspects of negotiating payment terms is a broader business strategy. You have to ask yourself what kind of relationship you want to build with your customer in the long term.

A loyal repeat customer should be rewarded: these accounts form the backbone of your business, driving repeat business and ultimately solid operational cash flow. Likewise, when there are unpaid invoices, you need to maintain a good relationship with the customer and relieve tension so that delays don't turn into bad debts.

There is no magic formula to negotiate the perfect payment terms. But a thorough understanding of your financial situation and that of your customers, and defining a clear business strategy can help you lay a solid foundation for business credit terms. Coupled with a good commercial credit insurance partner, these steps can help you manage risk effectively and grow your customer base.