How to negotiate with suppliers
How and when you pay your suppliers has a huge impact on your business' cash flow – and survival. And, given the economic climate, that means some negotiation might be in order.
What we're talking about
If your small business procures goods or services from other companies, then they are your suppliers. Factors like how much, in what form and when you pay those suppliers are set out in the payment terms, which are agreed upon in advance by both sides.
Although in many sectors it's common for you to pay after you receive the goods or services (AKA trade credit), you may have to pay upfront if you're a new business with little or no trading history – it'll take a little while before suppliers allow you to pay on credit.
You'll be issued with an invoice that you have to pay within an agreed period, like 10, 30 or 60 days. If you don't pay before the agreed date, you'll be hit with a charge and it can hurt your credit rating. Most suppliers will have standard payment terms but, in plenty of situations, negotiation is possible – particularly if you've been with a supplier for a while.
Why it's important
In the current economic climate, negotiating (or renegotiating) your payment terms can be the difference between survival and going bust. But this is ultimately about cash flow, so you can negotiate whenever it feels right for you. You need to make sure you have enough money in your business to pay for your outgoings and make the right investments. Extending the time you have to pay off invoices can help you spread your expenditure. It also gives you leverage if you need to make changes to what you've been supplied.
Paying invoices late is a huge problem in the business world – in the UK, nearly three in every five businesses have money tied up in late payments, according to a survey carried out by a major bank earlier this year. Supplier relationships are a huge part of how you operate, so it's essential that you build and maintain healthy relationships that suit both parties. While you might think your suppliers won't budge on the terms they've set, approaching them early and strategically can have surprising results. It's also in your suppliers' best interest for you to be able to manage your cash flow well – if you can't trade, then you can't place further orders. So, you're aiming to establish a mutual understanding that you'll both contribute to each other's success.
Things to note
It's all about protecting the relationship. As much as you need to look after your business, protecting and building a relationship with your supplier should be a priority. Try to shift the framing of discussion from negotiation to a two-way conversation that presents value for both parties. You're looking to find an agreement that suits you both, so understand their pain points, be open and honest in your communication and don't just threaten to walk away or find someone new. That said, if they really won't work with you to solve problems, they might not be a long-term strategic partner.
There are some key terms to get your head around. There are lots of acronyms and terms that you should get your head around before you get to the negotiating table. Key ones include: PIA (payment in advance); net 30/60/90 (payment 30, 60 or 90 days after the invoice lands); COD (cash on delivery); EOM (end of the month); forward dating (invoicing for payments that'll be made after you receive the order); proforma invoice (a preliminary document that indicates an intent to purchase a predetermined number of products). Here's a fairly exhaustive list of relevant terms.
You'll need to pick your priorities. Chances are you'll probably have more than one supplier – don't try to negotiate with all of them at once. This is about setting your priorities and considering which of your supplier relationships will most affect your business, and where you have leverage or have built up strong relationships. It's essential to consider which deserves more of your time, but that doesn't mean treating the others poorly – they may be your strategic partners one day.
How to negotiate payment terms with suppliers
1. Decide where to focus your attention. Consider all of your suppliers and identify which payment terms will make the biggest impact on your business. Typically, that might be those you spend most cash with and will make the biggest difference to your cash flow. Other factors include how long you've been working with them, which other suppliers are availableand how much you plan to spend with them going forward.
2. Identify your key priorities. Before you approach a supplier, think about what you're hoping to achieve from the negotiation. Is it to do with pushing your payment terms from, say, 30 days to 45? Are you looking for a price reduction? Are you looking for a discount for buying in bulk? Think about what your supplier might counter-offer and what you'll concede. Write a list of non-negotiables that you won't sway from, as well as what's high and low on your priority list.
3. Do your research. Come to the negotiating table armed with knowledge. Find out norms in your sector: what are typical timescales for settling invoices? What are other suppliers offering as standard terms in your sector or adjacent sectors? Price-matching is a familiar tactic to use – it's also good to know what else is out there in case you can't find common ground. If you have any really large orders, consider running a tender every couple of years to make sure that you have a clear view of the other supplier options out there.
4. Think about your supplier's point of view. Understand the pain points of your supplier, considering how many other customers they have and broadly what the state of their sector is. Try to put yourself in their shoes and consider what their priorities might be.
5. Consider ways that you can help them. Based on the above, think about some key ways that you can benefit their business. Can you commit to longer-term contracts? Can you recommend them to other businesses in your sector? Can you offer prompt payment in certain situations? Can you pay in their local currency? Can you increase purchases in the future?
6. Find the right person to talk to. There's no point wasting time with someone who doesn't have the authority to make big calls. Seek out the decision-maker – it won't always be easy to track them down – and then find the right medium to open a conversation. Ideally, that would be face to face or by phone to develop a personal relationship.
7. Negotiate – and compromise. With the information you've amassed, negotiate with your supplier, explaining what you're looking for. No matter what you go in there thinking, you shouldn't expect to get the exact terms you're after. Prepare for compromise. You can ask for more than you need, but don't be unrealistic. Ideally, both parties should leave the discussion pleased with their end of the bargain.
8. Get it in writing. Hopefully, new payment terms have been struck. While you might reach an agreement verbally, you'll need to follow up in writing. That can be in the shape of an email or, better yet, a legally binding contract. It should include details of price, payment terms and delivery schedule.
9. Set up a regular channel of communication. Though this may already be in place, make sure that you end any negotiation process with an improved way of staying in regular contact with your supplier. Remember, this is about strengthening your relationship and staying close. If possible, visit your main suppliers every three to six months, updating them on your progress. This should make negotiating terms in the future much easier.
• How much – and when – you pay your suppliers is critical if you want to maintain healthy cash flow. Revisit this every few months.
• When it comes to negotiating payment terms, you need to put in the research beforehand – and come equipped with info on your sector and your supplier.
• Don't get carried away with aggressive negotiation tactics. Your focus should be on open communication, strengthening your relationship with your supplier and finding a deal that both parties are happy with.
Perspective. Small business owners give 13 essential tips on how to negotiate with suppliers via business magazine Inc. Meanwhile, Harvard Business Review magazine talks about dealing with powerful suppliers when you feel like you have no leverage.
Example. If your suppliers are abroad, this video from business advice site StartupBros should be helpful – it's a deep dive into how to negotiate with Chinese suppliers on retail giant Alibaba.
Tool. If you're not the most confident negotiator, business advice site Procurement Tactics has a negotiation checklist to help guide you.