Supplier payment terms can be tricky to manage because they impact your business’ cash flow.
But with the right tools and processes in place, supplier management can run like clockwork.
Below is everything trade contractors need to know about managing supplier payment terms.
Table of Contents
What Are Supplier Payment Terms?
Supplier payment terms are a method of delayed payment. Suppliers understand that customers cannot afford to pay upfront for their big purchases, so they set payment terms that allow customers to cover the purchase cost over a period of time. These terms will set out how and when payment will happen.
“Written correctly, payment terms provide a clear agreement between two parties on how remuneration will be handled,” the team at Contractor UK writes. Those terms will include details such as how and when invoices will be sent, the timeframe for payment, and what proof of payment, if any, is necessary.
Here’s a simple example: Imagine an electrician needs to buy 500 spools of copper wire for a project they’ve been contracted for. The copper wire supplier asks for half upfront and then offers net-30 payment terms on the remaining half. This means the electrician would have to pay in advance for half of the order, then they would have 30 days from the delivery of the order to pay the other half.
Trends in Supplier Payment Terms
There are other ways to finance the procurement of supplies and materials — by paying with a credit card, for example — but supplier terms are the most popular option among trades businesses.
According to Billd’s most recent National Subcontractor Market Report, 87 percent of responding trade contractors said they used supplier payment terms to make purchases.
And net-30 terms are the most common. The problem with net-30 payment terms in construction, though, is it takes subcontractors on average 74 days to get paid for work, according to Billd’s research.
Can You Negotiate Supplier Payment Terms?
Often, yes, but this depends on the supplier.
Very big suppliers have the power to dictate terms. Smaller suppliers will be more willing to work with you on payment terms.
“Remember, as the customer, you have bargaining power,” the team at NevadaSmallBusiness.com writes. “Vendors and suppliers want your business. They need your business. Most will be willing to negotiate favorable terms, especially if you have the potential to generate significant business for them.”
Any negotiations you have with suppliers should start with an assessment of your own cash flow, and what you need to do to maximize that. Whether you’re trying to maintain your treasury levels or simply ensure that all of your supplier invoices don’t arrive at the same time, this defines your starting position for negotiations.
From there, negotiation becomes a matter of striking the right balance between protecting your cash flow and maintaining a good working relationship with your supplier. Here are a few things you can do to strike that balance:
- Get to know your supplier, and let them get to know you. Let them know what kind of sourcing budgets you have for the projects you’re working on. But more importantly, let them see the human faces behind your company’s name.
- Consider your supplier’s position. They want your long-term business, so help them understand how net-60 terms now can help set you up for a profitable and durable relationship.
- Ask for more than you expect. If you need net-45 terms, ask for net-60 so that your negotiated middle-ground position is still a favorable one for your company.
The Downsides of Supplier Payment Terms
Time is money in every business, so when a supplier gives you 30 or 60 days to pay them back, that time comes with a cost.
In some cases, the supplier might charge interest. Even if not, trade contractors pay an opportunity cost when they negotiate supplier payment terms, Billd President and CEO Chris Doyle writes.
“Most suppliers offer meaningful discounts for subcontractors who pay upfront, a discount you forfeit every time you use terms,” Doyle explains. “These discounts vary from 3% to as high as 8% when materials are paid for upfront. If you use terms, you don’t see the discount.”
If you do have the ability to pay upfront, you can try to negotiate this kind of discount for your business. You can also use financing options such as Billd’s service, or you can seek financing from a lender or from your bank (likely via your company credit card). In such cases, just make sure the upfront discount compensates for any additional costs you will have to pay for financing the upfront purchase.
Managing Supplier Payments and Vendor Relationships
Your partnerships are the lifeblood of your business. Ensuring a good working relationship with each of your suppliers creates so many long-term benefits for your company. Don’t lose sight of this as you’re considering short-term cash flow strategies.
Subcontractors can strengthen their supplier relationships considerably by improving their purchase order processes. The purchase order is the legally binding document that outlines the agreed-upon terms of the purchase between customer and supplier. This document is where supplier payment terms are all spelled out.
Fortifying the purchase-order process means:
- Investing in reliable software to streamline the creation, tracking and approval of purchase orders.
- Setting up clear lines of communication with suppliers to ensure deliveries are always on time, order fulfillment is accurate and everyone’s expectations are met.
- Taking time to regularly review and update the purchase order process.
Having a network of trusted suppliers is an absolute necessity for a growing trades business. Tending to and managing that network takes time and effort, but it’s important work.
When you have solid processes and software for managing documentation, construction projects, and your costs, then you will have the insights at your fingertips you need to meet your supplier partners on level ground. With visibility into your own costs and your own needs, you can approach payment terms negotiations with your partners’ needs in mind, as well, and come to agreements that benefit all parties.
To learn more about how eSUB can help you streamline your purchase orders, get your documentation organized and optimize your spending, book a demo today.
Images used under license from Shutterstock.com.