How Flexible Payment Terms Can Win You a Competitive Advantage

It has become the new normal for customers to pay later, and the pressure this places on middle market sellers and suppliers is obvious. Now that big customers are much less hesitant to demand an extension on payment terms or make a late payment, you'll need to consider acquiescing if you want to compete with other midmarket businesses. Although this helps your customers preserve capital, it makes it more difficult for you to do the same.

When you and your customers negotiate payment terms, there are many factors to consider before making modifications. By being flexible with payments and providing options that meet individual client needs, you'll better maintain customers and even attract new ones. Here are six suggestions to consider:

  1. Know your value proposition. Customers buy from you because your middle market company offers a strong, unique value proposition. You should also have a clear understanding of your market, your rivals, and what payment terms are standard in your industry. Place a premium on your customer relationships to make it difficult for customers to consider changing suppliers.
  2. Approach payment terms on a case-by-case basis. Recognize the differing needs and habits of your customers. It's best to maintain your existing terms, then be flexible in adjusting them. For instance, if you have a big customer who pays your 30-day invoice around day 45 and has done so for two years, you might simply negotiate a 45-day payment period for future invoices with a small but effective penalty for late payments. This helps both sides and better reflects business realities.
  3. Offer early payment discounts. Any customer who's willing to pay early and help you with cash flow should be rewarded and/or recognized. Make this condition part of all agreements. If a customer pays a 30-day invoice within 15 days, offer a small discount. You could also recognize customers who consistently pay on time or early by creating a special loyalty program.
  4. Implement milestones that trigger a payment. In some cases, you might consider breaking down payments into installments or triggering payments when a certain action occurs, such as when an order is placed, shipped or delivered. This strategy might encourage some customers to be more organized and regular with their payments.
  5. Diversify your customer base. You want to avoid having one giant client that buys all your production. If your customer base is too concentrated, then those customers have the advantage. Putting your eggs in multiple baskets should be a key strategic initiative of all middle market companies, and it will improve your ability to manage payment conditions.
  6. Consider financing options. Though this should be a last resort, done only when payment extensions have disrupted cash flow to a point where liquidity is too tight, there are a number of financial solutions that can help. For example, you might consider selling your receivables for cash, or pursuing credit at lower rates by offering equipment as collateral for the loan. These options offer risks and rewards that need to be carefully measured.

The best way forward is to think flexibly about how to preserve capital while retaining strong client relationships. There won't be an all-encompassing solution for use with every customer, but your middle market company should carefully develop a menu of options to juggle the company's needs and your customers' priorities. Your existing customers and potential clients will see flexibility as a reason to continue or start doing business with you.

At what point do you cut off a relationship with a client that is consistently late on payments? Let us know what you think by commenting below.

Boston-based Chuck Leddy is an NCMM contributor and a freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+.


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