Resources | Working Capital | June 19, 2024

How Businesses Can Adapt to Longer Payment Terms

Worried about waiting longer to get paid? Try these strategies for shortening your wait time and boosting your cash flow.

Worried about waiting longer to get paid? Try these strategies for shortening your wait time and boosting your cash flow.

Longer payment terms are a big concern for many smaller companies, but they don’t have to be. 

With a few small adjustments, businesses can find the liquidity they need to meet their financial obligations and keep growing. 

In this post, you’ll discover a few ways to increase your company’s liquidity and avoid shortfalls in cash.

Make it easy for customers to pay you

Ideally, that means installing an online invoicing and payment platform, one that can deliver invoices via email as soon as they’re ready. The platform should also offer a portal where customers can authorize immediate (or almost immediate) electronic payment. 

This isn’t a bulletproof solution for 90-day payment terms. But when you want to improve cash flow ASAP, you want to remove as many obstacles in the payment process as you can. If you’re already waiting months, don’t let your payment process delay things by an additional two weeks. 

Don’t be afraid to propose other solutions

Some customers are so big (and so important to your company) that it isn’t possible to negotiate  when they lengthen payment terms. But you might be surprised by how many of them will be open to finding a deal that works for you and them. 

For example, you might ask if you can submit your invoice before the work has actually been completed. That way, they can have the invoice in their system and ready to be paid as soon as it’s time. 

Try to minimize the length of the extension. Instead of a 60-day term, propose 45 days. Your customer might be fine with a slightly shorter window. 

You can also propose alternate payment plans. Maybe your buyer orders a three-month supply of a particular product. Instead of sending one big payment, they might be open to a series of smaller monthly invoices over the next few months. (Or you could try the inverse if you’re having trouble getting timely payments from a customer — send a single, large invoice instead of monthly bills.) 

Reach out immediately when payments are late

This holds true even for the biggest customers. If a customer hasn’t paid by the agreed-upon date, you should remind them and check on the status of your payment. For new customers, you might even send a reminder five to 10 days before the invoice is due. 

In some cases, they might need a reminder. Maybe something has quietly gone wrong in their payments department. Your call could help things get back on track. 

More importantly, it shows your biggest customers that you’re taking your finances seriously — which is something they want to see in their partners.  

Offer a discount for early payment

Sometimes, all it takes is a little incentive. By offering a small price break in exchange for faster payment, you could inject the necessary cash back into your business. Examples of discounting programs:

  • Static discounting offers a flat, fixed discount for early payment. A good example is 2/10, net 30 — aka “If you pay me within 10 days, I’ll give you a 2% discount. Otherwise, you have to pay me the whole amount within 30 days.” The customer could pay on Day 1 or Day 10, and the discount would remain the same. Pay on Day 11? They get no discount.
  • With sliding scale discounts, the size of the customer’s discount is based on how early they pay. The later the payment, the smaller the discount. Theoretically, that means the discounting window could run the entire length of payment, but anyone who pays on Day 29 won’t claim much of a discount.  

Take advantage of your customers’ early payment programs

Many leading companies have their own programs that will provide expedited payment of suppliers’ invoices, in exchange for a discount on the invoice.

Those could take the form of a dynamic discounting program, such as the ones through C2FO. Dynamic discounting is similar to a sliding scale discount, in that earlier payments typically receive larger discounts. 

But dynamic discounting adds an element of supply and demand. With C2FO, each enterprise buyer operates a marketplace where suppliers offer a discount rate based on their needs and comfort level. 

At the same time, the buyer sets a desired rate. The platform’s algorithm sorts through all the offers to determine which ones, averaged together, help the buyer reach that target. Those suppliers are then paid early. 

Look for other sources of short-term working capital 

Unfortunately, not everybody has access to a dynamic discounting program like C2FO’s. (Seriously, though, you should check our list of partners to see if any of your customers offer early payments through our platform.) 

If circumstances demand it, there are other options — like lines of credit, factoring or short-term business loans — that can help you access liquidity and bridge the gap between doing the work and getting paid. This post breaks down a few of those options

The bottom line on longer payment terms

Longer payment terms don’t have to be disruptive for smaller businesses. Use the strategies above to reduce the impact of those waits and find other sources of working capital, such as dynamic discounting. 

To learn more about how C2FO helps suppliers shrink their DSO, click here.