4 Hidden complications caused by payment terms
Setting payment terms with your vendors is a necessity in today’s business environment. Your customers demand to have payment terms with you - so you need to have payment terms with your vendors to balance the scale and make sure that your working capital investment remains reasonable.
However, payment terms with vendors carry with them hidden costs to you, the buyer, that may result in 'hard' costs to the business. This blog post describes 4 hidden complications that might be created due to the payment terms you have with your vendors, and offers a way to manage / mitigate them in a way that does not cost you a dime to implement.
1. It weakens your relationships with vendors
Vendors don't like waiting to get paid. This might create friction and frustration which might be further intensified if your vendors have wait even longer than the agreed payment terms to get their cash in case your company is repeatedly late on paying their bills and/or if you were able to secure longer payment terms compared to the industry standard. This leads to the next item...
2. It throws you down the priority list
If the payment terms you have are longer than the industry standard, or even if they’re on par but your vendors have shorter terms with other customers (these might be your competitors!), you might be pushed down the priority list when supply runs temporarily or permanently thin for any reason (for instance - due to a global pandemic…).
3. It increases supply chain risks
Some of the goods and services you purchase are critical to your business. Some of your vendors might be financially weaker than others, and in many cases, you have no way to know whether your vendors are financially weak or strong.
Financially weak vendors that deliver critical goods or services are a business continuity risk to you. If your purchasing volume from them is relatively high, the longer they wait for you to pay them, the higher the probability of them getting further into financial distress. Risking your business too as a result.
4. It increases operational discrepancies
If you don’t pay your vendors immediately upon receipt, your approved payments 'wait' for their turn to get paid. These may be delayed from time to time due to administrative problems, clerical errors or other reasons, and not be paid to your vendors on time. Vendors (especially smaller ones) may cease to render the service or stop shipment of goods if they don’t get paid on time, disrupting your operations.
Throwing your hard-earned vendor payment terms doesn’t make financial sense, nor will your finance department agree to that… But - that doesn’t mean you can’t eliminate these complications in an easy way that costs you nothing.
Set 15 minutes to how you can avoid payment terms complications with your vendors without paying them early and at no cost to you - talk to a product expert.
Extending vendor payment terms CAN be frictionless and maintain a balance between you and your vendors - learn how in this e-book.