How to Negotiate Payment Terms with Your Suppliers

Are rising costs creating pressure on your cash flow? Knowing how to negotiate better payment terms with your suppliers could be your business’s strategic edge to stay ahead.

Rising costs and economic uncertainty are putting pressure on businesses of all sizes, making it more important than ever to manage cash flow effectively.

From the increasing prices of raw materials to greater labor and operational expenses, maintaining financial flexibility is crucial for stability and growth.

One often overlooked but highly effective strategy to safeguard your business is to negotiate better payment terms with suppliers.

By extending payment terms or structuring deadlines that align with your cash flow cycle, you can create breathing room, strengthen your financial position, and navigate uncertainty with greater confidence.

This article will explore key negotiation strategies to help you optimize payment terms, improve liquidity, and set your business up for long-term success.

Challenges of Rising Costs on Business Operations

If you’re in charge of managing your company’s finances, you’ve likely seen firsthand how rising costs are making it harder for businesses across the US to maintain stability and achieve growth.

For countless owners, managing these expenses can feel like an uphill battle.

Here’s a closer look at five major factors driving these rising costs and how they impact your operations.

1. Inflation

Inflation is one of today’s biggest hurdles, driving up the cost of goods and services while squeezing already narrow profit margins—especially for SMEs.

According to the US Bureau of Labor Statistics, inflation rates reached historic highs in recent years, with annual increases in the Consumer Price Index (CPI) peaking at over 9% in mid-2022.

These rising costs directly impact operational expenses, from raw materials and transportation to utilities and wages.

Inflation can severely strain budgets for SMEs, which often lack the financial buffers of larger corporations.

Every extra dollar spent on raw materials, transportation, and wages is one less dollar for reinvesting in growth, such as hiring or expanding into new markets.

2. Access to Credit

Financing has become more complex, particularly after several regional bank closures in 2023 tightened lending conditions.

According to the Federal Reserve’s Seniors Loan Officer Opinion Survey, nearly half of banks reported stricter lending standards for commercial and industrial loans following these closures.

Without reliable credit, your business may find it harder to cover day-to-day expenses, let alone invest in growth opportunities.

That’s why negotiating better payment terms with your suppliers is more important than ever–it can provide the steady cash flow you need to weather these challenges.

3. Interest Rate Volatility

Unpredictable interest rates make planning tough for your business, hindering long-term strategies and major financial commitments.

In 2023, the Federal Reserve raised rates to their highest level in over 20 years, peaking at 5.5% in an effort to curb inflation.

This move, however, also drove up borrowing costs, putting additional pressure on SMEs that rely on loans to fund operations or growth.

To try and counter this, in 2024, the Fed made its first interest rate cut in four years and is considering further cuts, which should ease a bit of pressure on borrowers but by how much is unknown.

4. Hiring and Employee Retention

If you’re managing a small business, you’ve likely also felt the pressure of rising wages and benefits as competition for skilled workers heats up.

Finding and keeping the right talent isn’t just challenging—it’s getting more expensive.

A survey by the National Federation of Independent Business (NFIB) found nearly half of small business owners struggle to fill job openings due to a lack of qualified candidates, driving up recruitment expenses.

To stay competitive, SMEs are finding creative ways to stand out—such as offering professional development opportunities.

At the same time, managing cash flow effectively—by negotiating better payment terms with suppliers, for instance—can free up the resources you need to invest in hiring and retention strategies.

This not only helps your business stay afloat but also positions you for long-term success in a tight labor market.

5. Supply Chain Disruptions and Trade Tariffs

Trade tariffs significantly influence supply chain dynamics, often leading to increased costs and operational challenges for businesses.

Recent developments, such as the US imposing tariffs of 25% on goods from Canada and Mexico and 10% on Chinese imports, have heightened these challenges.

These measures can result in higher prices for raw materials and components, prompting companies to seek alternative suppliers or adjust their sourcing strategies.

Such adjustments can lead to delays and increased expenses, further complicating supply chain management.

Smaller businesses, lacking the financial resilience of larger corporations, are particularly susceptible to these disruptions.

Negotiating favorable payment terms becomes crucial in this context, as it can help stabilize cash flow, mitigate the impact of rising costs, and maintain operational continuity.

Managing Cash Flow by Negotiating Payment Terms

With inflation, tight credit, fluctuating interest rates, hiring challenges, and supply chain disruptions all impacting your bottom line, managing cash flow effectively has never been more important.

One powerful way to stay ahead?

Negotiating better payment terms—both with your suppliers and your customers.

Payment terms define how and when money changes hands.

While smaller orders might call for upfront payment, larger or custom orders can allow greater flexibility—such as installment plans split between a deposit, scheduled payments, and a final balance upon delivery.

On the flip side, you can also work with customers to structure payment schedules that align with your revenue needs and help minimize delays.

Taking a proactive approach to terms negotiations can boost liquidity, free up working capital, and give your business the financial flexibility to navigate economic uncertainty with confidence.

By keeping a clear view of your finances—through tools like a cash flow statement template—you’ll know the best times to send or request payments.

A well-planned schedule fosters trust, aligns payment cycles with your cash flow, and even unlocks discounts that improve your bottom line.

You can set all these things out in an invoice.

Terms on an Invoice to be Aware of

When writing an invoice, it’s important to be clear about when and how much needs to be paid.

Here are some common payment terms you should keep in mind:

• Payment in Advance (PIA): payment must be made before goods or services are delivered.
• Net 7, 10, 15, 30, 60, 90: payment is due within 7, 10, 15, 30, 60, or 90 days from the invoice date.
• Cash on Delivery (COD): payment is collected at the time of delivery.
• End of Month (EOM): payment is due at the end of the month in which the invoice is issued.
• 1MD–2MD: payment is due one or two months after a full month’s worth of goods or services has been delivered.
• 5/10 Net 30: a 5% discount applies if payment is received within 10 days. Otherwise, the full amount is due within 30 days.
• 21 MFI (Month Following Invoice): payment must be made by the 21st of the month following the invoice date.
• Cash Before Shipment (CBS): payment is required upfront, before the creation or delivery of goods.
• Line of credit: payment may be spread out over time, up to an agreed credit limit.
• Stage payments: payments are made in installments at set stages of a project or contract.

Pay Early or Pay Later?

Deciding when to pay depends on your cash flow cycles and supplier relationships.

Some suppliers offer discounts for early payments—a worthwhile perk for businesses with enough liquidity.

According to research by Atradius, 42% of invoices are paid on time, while 8% are eventually written off as uncollectible.

Paying promptly can strengthen supplier relationships and potentially reduce costs.

On the other hand, asking for extended payment terms can help you align payments with incoming revenue and maintain financial stability.

Balancing these strategies is part of a broader negotiation process—one that can ultimately improve your bottom line and keep both you and your suppliers on good terms.

How to Negotiate Payment Terms

Negotiating favorable payment terms can strengthen your financial position, help you retain more cash, and reduce reliance on loans or overdrafts—all of which can lead to better partnerships with suppliers and customers.

Here are several strategies for getting the best possible arrangements:

1. Tailor your Approach for New Versus Existing Clients

Understanding who you’re working with is the foundation of a successful negotiation.

Your tactics will naturally differ for new clients and those you’ve served for years:

New clients

• Set clear expectations: agree on payment schedules and terms before starting the work.
• Offer early payment incentives: provide a small discount or perk to encourage prompt payments.
• Communicate late fees: establish penalties upfront to discourage delays.

Existing clients

• Listen first: talk through any challenges they face with paying on time.
• Suggest payment plans: offer installment options or other creative arrangements.
• Find a win-win: be ready to adjust terms within reason if it means a healthier, long-term relationship.

2. Prioritize your Negotiation Targets

Start by focusing on your biggest suppliers first—it’s a smarter and more efficient way to negotiate.

Each conversation will give you valuable insights that you can use to refine your approach moving forward.

Plus, as you build your priority list, you might discover alternative suppliers offering better terms or pricing, giving you more negotiation options.

3. Define Payment Arrangements Early

When collaborating with a new supplier, don’t wait until the last minute to discuss payment schedules, pricing, and delivery details.

It’s best to bring these up early to align terms with your cash flow needs rather than just accepting default options.

For instance, your businesses might prefer to extend invoices beyond 90 days to manage large expenses better.

Bigger companies often have an easier time with payment term extensions, but smaller firms can achieve similar results by highlighting consistent order volumes and reliable payment history.

4. Be Transparent and Build Trust

Suppliers want to know the reason behind your request for different terms.

Rather than issuing ultimatums, explain how more flexible payment cycles can support continued or increased business.

Additional Strategies Include:

Promoting their services

Share information about your supplier’s offerings within your networks or to potential clients.

Committing to future orders

Promise a minimum spend or a set number of purchases in exchange for extended terms.

5. Stay Flexible and Aim for Compromise

Negotiations often succeed when both sides benefit. If you propose moving from net 30 to net 90 terms, consider settling on net 45 as a happy medium.

Finding the balance fosters a collaborative environment and sets the tone for future deals.

6. Do your Research

Before negotiating, take the time to understand the standards of your supplier’s industry.

For example, North American firms are experiencing an uptick in late payments and bad debt: 55% of B2B invoiced sales are overdue, and around 9% get written off entirely.

In the electronics and IT sector, late payments have risen due to liquidity problems and invoice disputes, making suppliers wary of extending lenient terms.

With insights into your cash flow needs and the challenges your suppliers face, you’ll be well-prepared to secure payment terms that benefit everyone involved.

How to Secure Timely Payments After Negotiating Terms

Negotiating better payment terms is a great start but making sure you actually get paid on time is just as important.

Here are a few simple ways to keep things running smoothly:

Invoice Promptly and Include Key Details

Send invoices immediately after you deliver goods or services.

Make sure the invoice includes clear payment terms, due dates, and any penalties for late payments.

Follow up Quickly on Late Payments

Don’t wait to chase overdue payments.

A friendly reminder shortly after the due date can often resolve delays without straining the client relationship.

Highlight Payment Penalties

Reinforce the terms of your agreement by clearly communicating any late payment fees or penalties to encourage timely action.

Use Guarantees When Necessary

If the client has provided collateral or assets as a backstop guarantee, consider this option a last resort.

However, always exhaust other avenues first, as maintaining a positive relationship is crucial for long-term success.

Simplify your Payment Process

Negotiating payment terms is a strong step toward healthier cash flow but pairing that strategy with the right tools can take it even further.

Online invoicing software automates the billing process, ensures on-time payments, and keeps you updated with real-time tracking—so you can quickly follow up on any overdue invoices.

Features like automated reminders and multiple payment options (credit card, ACH, PayPal) help customers settle bills faster, reducing late payments and freeing you to focus on growth.

By integrating advanced financial tools, you can turn payment challenges into genuine opportunities for lasting success.

Final Thoughts

In times of economic uncertainty and rising costs, securing more favorable payment terms isn’t just a financial convenience—it’s a strategic necessity.

Open communication with your suppliers is key to reaching agreements that benefit both sides.

By taking a proactive and strategic approach—through preparation, patience, and transparency—you can secure payment terms that not only improve cash flow but also help your business remain agile and resilient in an unpredictable market.