Eliminating the win / lose tradeoff between you and your vendors
Payment terms are the greatest cause for tension between a buyer and its vendors. Can you turn this into a win / win situation?
Payment terms are the largest cause for tension between a buyer and its vendors. Setting payment terms between you and your vendors might cause friction and tension - you want to pay as late as possible; They want to collect as early as possible. It’s a zero-sum game.
Today’s early payment arrangements do little to solve this problem: If you apply a 2/10/net30, dynamic discounting, p-cards, and arrangement with a vendor, you have to pay early (hurting your cash flow). While your vendor will collect all of its invoices quickly at a deep discount (hurting its margins). While this may work with low-spend vendors (where both your cash flow hit and their margin hit are contained), it typically doesn’t work with high-spend vendors, since it would require you to commit to pay large dollar amounts very quickly, while your vendors commit to accept a heavy discount for a high sales volume.
However, a vendor early payment solution that’s funded by a 3rd party can help you turn this win/lose situation with your vendors into a win/win one.
The underlying idea is simple:
Whenever your select vendors want to collect one of the invoices you’ve approved early (prior to its maturity date), they may request a 3rd party to accelerate that payment, for a small fee. You’d pay that 3rd party when the invoice reaches maturity - not a day too early.
This way, you never have to worry about paying early. You always pay the face amounts of your invoice when they’re due - and your vendors may control when they get paid and pay a small fee only when they actively accelerate a payment. Let’s see how this may look like in practice (assume that ABC is your company):
Creating a win / win situation
Breaking the payment terms tradeoff generates procurement efficiencies that translate to your company’s bottom line, and releases supply chain pressure:
It increases your flexibility to negotiate longer payment terms with your vendors compared to what you already have today, delivering quantifiable benefits to your cash conversion cycle, working capital investment and WACC - all translate directly to your bottom line.
Furthermore, it generates incremental savings and drives cost avoidances, allowing you to make a more efficient use of your FTEs and show quantifiable cost cuttings.
Lastly, it’s a great way to tighten your vendor relationships and strengthen your partnership with them, assisting you to reduce supply chain friction and risks.
Your vendors get a compelling proposition too. They’re able to control when they get paid and gain access to an uncommitted, optional funding channel. They enhance their cash flow management flexibility, can hedge risks and may even sell you more!
Set 15 minutes to learn how you can break the payment terms trade-off within 4 weeks - talk to a product expert.
Take a look at our e-book ‘Do’s and Don’ts when Negotiating Longer Payment Terms with Your Vendors’ to learn how you can extend vendor payment terms while mitigating vendor friction - download here.