Longer payment terms have become a growing burden for small and medium enterprises (SMEs). In the wake of the credit crunch of the late 2000s, some of the biggest global companies started to throw their weight around by extending their payment terms and others have since followed suit.

As major retailers, popular consumer brands and other big name players used to calling the tune with their suppliers have continued to move from 30-day payment terms to 60, 90, even 120 days in the last couple of years, SMEs unwilling to risk losing some of their biggest clients have simply had to accept and cope. According to figures published in the Wall Street Journal, up to 64% of small businesses have reported having invoices that went unpaid for at least 60 days.

The cost for many has been choked cash flow, leaving little money to grow the business, absorb seasonal fluctuations or weather unforeseen events. This has simply made things precarious for many. There are, however, ways SMEs can position themselves to minimise the impact. So, what works and what doesn’t?

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 Pass it onto your own suppliers

Extending your own terms is easier said than done – and often very short-sighted. First, ask yourself if you really have the clout to pull it off? While it might be tempting to tell your suppliers that you are moving to longer payment terms in response to client actions, you risk having them walk away.

Even if you succeed in most cases, it may break some suppliers that can’t manage the impact on their own cash flow. Then where will you be? Making your own suppliers’ positions more tenuous is usually not a good long-term plan for an SME.

Find allies and lobby hard

If you are being pressed for longer payment terms, you are certainly not alone. And marshalling support from other businesses for action on the issue by the Government and industry bodies may help. In fact, the Government has been very supportive, backing the Prompt Payment Code, which is administered by the Chartered Institute of Credit Management. But the code is voluntary and, while signatories breaching it can be ‘struck off’, it has no real teeth other than public pressure.

This did actually work in 2015 with drinks giant Diageo, which backed down on a plan to impose 90-day payment terms on suppliers after being pressured via the media. However, other companies not in the glare of the public spotlight are less likely to be swayed and headlines about unfair business contracts are actually rare.

 

Take a tough negotiating stance

Don’t just blindly accept new payment terms from a big client in a position of strength. If you are a key supplier not easily replaced – or even if you are not – pushing back can be quite effective. Payment terms should be set out prominently in contracts, and it should be made clear that changing them opens the way to renegotiation, which can impact both sides.

There was an example of one marketing services company that, when presented with a demand to change payment terms from 30 days to 60, said that would be fine as long as the client understood that the price was based on 30 days for repayment and 60 days would require a 10% rise. The client decided to stick with the status quo.

The lesson is that, if you challenge companies on longer payment terms and ask for some level of compromise, you stand a good chance of getting it. Even if you don’t get the same terms you had,  you may get more than was initially offered.

Be robust and precise in your invoicing

If clients are going to take longer to pay, you cannot afford any delays on your end – so make sure you bill them as soon as possible. Be systematic in your invoicing, sending invoices out on time and ensuring they are accurate, with all details and any necessary PO numbers included and correct.

Mistakes do get made and so you have to take steps to avoid as many as possible. There are many good invoicing applications geared for SMEs that can help eliminate the potential for human error, guaranteeing that invoices and follow-up reminders go out on schedule, while tracking where each client is in the payment process.

You may also want to build in incentives for early payers (e.g. a 4% discount for payments within 15 days, 2% for 30). Eating into your sales revenues may seem like a compromise too far, but it can ultimately make financial sense if it reduces borrowing costs and other expenses that result from cash flow problems.

 

Find financing you can build in

In the end, if you have pushed back all you can and still some clients are wedded to the idea of long payments terms – and you don’t want to simply drop them – then you have to structure your business to deal with the situation. That means having short term financing in place to ensure that cash flow remains strong, so the business is able to build on its successes and withstand any shocks.

A bank overdraft can help but pushing this towards its limit each month still leaves the business very exposed, while traditional loans are costly and complicated solutions that require time and effort to secure. Plus, a business loan doesn’t provide the type of steady cash injection that’s required.

The logical solution for an SME is invoice financing. One choice here is factoring, the practice of selling your invoices to a bank or another provider to release a percentage of the value up front, so you get the money ahead of the payment date. The trouble is traditional lenders can still be costly and cumbersome, with hidden fees, long contracts and slow decision processes.

A simpler, more straightforward solution involves a more modern, digital take on factoring: online invoice financing. This is a peer-to-peer solution, whereby SMEs can apply for invoice-backed financing from providers such as MarketInvoice in just a few minutes and have the money within a day in most cases – and for a lower fee (usually 1-3%).

This solution offers the most flexibility, as you submit as many or few invoices as you want, making it easy to match the financing to only the long dated invoices if that’s all you need. That way any debt is set directly against known incoming payments, so the invoice financing simply becomes a fixed part of your cash flow structure – which essentially makes the whole issue of late payments moot.