Your Supplier Payment Terms Are a Cash Flow Tool

Two suppliers quote for the same thing. One is 2% cheaper and wants payment in seven days. The other is slightly dearer and gives you forty-five.

Most businesses take the cheaper one without much thought. Depending on the amount and how tight your cash is, that can be the more expensive decision.

Why terms have value

Thirty extra days on a supplier payment is thirty days you keep your own money. If you are paying interest on an overdraft, that is a real saving you can calculate. If you are not, it is still cash available for something else.

The gap that matters

The number to look at is the distance between when you pay suppliers and when customers pay you. If you pay in fifteen days and collect in forty-five, you are funding thirty days of business out of your own pocket, permanently.

Closing that gap by ten days does more for your cash than most cost cutting.

How to ask

Terms are usually easier to get than price. A supplier who cannot cut the rate can often extend the term, because it costs them less and does not set a precedent on price.

Ask at the right moment: when you are about to place a larger order, or at renewal, not when you are late paying.

Then actually use them

This is where it falls apart. Terms are negotiated and then everybody pays on the same day as before out of habit.

Pay on the due date, not before, and not after. Early payment is an interest-free loan to somebody else. Late payment costs you the relationship and, under GST, can reverse your input credit if it passes 180 days.