How to negotiate payment terms with customers and protect cashflow

One of the biggest juggling acts for companies is keeping money coming in without the hassle and frustration of chasing late payments. It all starts by agreeing on payment terms with customers. Businesses must consider how to negotiate payment terms with customers, without losing potential business.

There is no question that your ultimate goal is to protect your cash flow. Especially if you are an owner-manager, as you don’t want to be one of the 82% of SMEs that fails due to cash flow problems!*

This makes it vital to be in the driving seat when negotiating payment terms.

However, you must be pragmatic. To build new customer relationships and bring them back for more (more often), you may need to be open to meeting some of their priorities and preferences.

This can make payment negotiations tricky, especially if you’re in a sector that requires deposits or staged payments. It can also be a challenge if you need to stick to rigid payment cycles so you can keep on top of your outgoings.

Guide for how to negotiate payment terms with customers

Plan out your payment goals and terms

Take time to plan or update your payment needs, deadlines and specific terms. A lot depends on the sector you are in and the precedents set by your competitors.

Businesses that need to buy substantial goods or services to meet their contractual obligations may be able to demand a deposit or part-payment in advance from their customers. Lengthy and complex contracts – such as construction projects – often require staged payments. In some professional and creative service sectors, retainers are the norm, with a clear set of additional ad hoc charges.

Keep in mind that your list of payment goals and systems may also vary according to the classification of an individual customer.

For example, you may have contracts that necessitate short credit terms. This is sometimes the case when dealing with new or smaller ventures, or when you are supplying perishable goods.

However, with larger, more lucrative customers, you may need to provide more flexibility. This ensures you dovetail with their payment cycles and purchasing criteria.

If your plan does need to include a degree of flexibility – according to the type and size of the customer – create a sliding scale of charges, timescales and payment terms for easy reference.

Committing all this down to a written strategy ensures that your sales team and other decision-makers are 100% in step. It avoids any maverick agreements or ambiguous negotiations.

Be scrupulous in credit checks

When negotiating payment terms with new customers, there are simple steps you can take to check their financial health and ability to keep to their deadlines. This includes looking at their published accounts, commissioning a credit search or asking them for references.

Never be shy about carrying out due diligence. If you need to flag this up with a customer, simply explain that you take your financial health seriously, and want to protect your staff and suppliers.

If you do find anything in a company’s history that sounds alarm bells, you may want to tighten your payment terms and shorten credit timescales.

Be clear and unequivocal with customers

When dealing with new customers, if you outline your terms and conditions and such things as payment deadlines clearly from the start, you are off on the right foot. Your terms of sale must be clearly laid out in contracts and in invoices, but it’s good practice to draw attention to key points during verbal discussions too.

If you need to negotiate new terms with your existing customers, transparency over why can ease these negotiations along too.

It all comes down to managing your customers’ expectations and making sure you don’t appear to be ‘moving the goal posts’ at any point.

Warmth, competence and efficiency

One of the basic principles of customer relations is showing the twin attributes of competence and warmth. Even in the technological age, people do business with people!

You need both these things when you are agreeing on payment terms and other commercially sensitive decisions with your customers.

It can come down to demonstrating exactly what they are getting for their money. Show that your payment terms are synergic with the standard of your product or service and run alongside high levels of customer service.

Consider if there are incentives you can use, to make your payment terms more acceptable. For instance, can you offer free shipping for upfront payments or percentage discounts for early invoice settlement?

Though of course, you may also want to include penalties for late payments, accompanied by an explanation of why you feel it’s necessary to protect your cash flow with these additional costs.

The twin attributes of competence and warmth are also needed to help to speed up invoice settlement when payment deadlines are breached. A friendly initial reminder can sometimes achieve far more than diving straight into threatening letters and nagging phone calls!

Building reputation through efficiency

You earn respect and trust not just from the quality of your goods or services. Your customer relations and business procedures are also being constantly assessed and evaluated. Including the way in which you handle payment negotiations and manage your credit systems.

Your customers may well be more open to your specific terms and timetable if they know you are a fair and efficient company. Something as simple as sending invoices and statements in a timely and accurate fashion can go a long way to building customer faith in your organisation!

That makes investment in advanced credit control software very wise.

Credit Hound by Draycir helps manage and control cash flow. All outstanding payments can be tracked and analysed, and the process of chasing late settlement is automated.

One of the advantages of this credit-control software is that it avoids setting an ugly precedent, by ‘letting’ a customer breach the payment terms you agreed on. The software leaves them with nowhere to hide!

Credit Hound also demonstrates to your customers that you are streamlined and consistent. If you understand how to negotiate payment terms with your customers in a productive way, your actions will support your brand and customer loyalty. This in turn will establish firm ground for payment negotiations, ultimately leading to happy customers and better cash flow for your business.