The SMB Guide to Negotiating Payment Terms

For many small and medium-sized manufacturing businesses, cash flow is the primary constraint on growth. You pay for raw materials on Day 1, pay for labor on Day 15, ship the product on Day 30, and—if you’re lucky—get paid by your customer on Day 60. This "cash conversion cycle" creates a working capital gap that must be financed, either through debt or by stalling other investments.

Negotiating favorable payment terms with suppliers is one of the most effective, non-dilutive ways to close this gap. Yet, many buyers accept standard terms ("Net 30") as if they were immutable laws. They are not. Payment terms are a variable in the commercial agreement, just like price and lead time.

Understanding the Terminology

Before entering a negotiation, it is critical to understand the financial implications of different term structures.

• Pre-Payment / COD (Cash on Delivery): The buyer bears 100% of the risk. You are effectively financing your supplier’s operations. This is common for new accounts or custom, high-risk fabrication, but should be transitioned away from as quickly as possible.
• Net Terms (30/60/90): The standard trade credit. "Net 30" means the full invoice amount is due 30 days after the invoice date (often defined as the shipment date or receipt date). Moving from Net 30 to Net 60 provides 30 additional days of liquidity, which can be critical for businesses with long production cycles.
• Early Payment Discounts (e.g., 2/10 Net 30): A discount (typically 1-2%) offered if payment is made within a short window (10 days), otherwise the full amount is due in 30 days. While attractive, skipping this discount to pay on Day 30 is effectively borrowing money at a high annual interest rate (approx. 36% APR).
• Milestone Payments: Common in capital equipment. Payments are triggered by events (e.g., 30% on order, 30% on design approval, 40% on delivery). These terms align cash outflow with project progress rather than arbitrary dates.

Why Suppliers Resist Extended Terms

Suppliers push back on extended terms for two reasons: risk and their own cash flow. Understanding their position allows you to structure a proposal that addresses their concerns while meeting your needs.

If a supplier refuses Net 60, it is often because they lack credit insurance on your company or because they are cash-constrained themselves. By offering transparency—such as recent audited financials or trade references—you can de-risk the relationship.

Strategies for Negotiation

1. The "Graduated" Ramp

For new relationships, do not expect Net 60 on the first order. Propose a defined path: "We will pay COD for the first two orders to establish trust. On the third order, we move to Net 30. After six months of on-time payments, we review for Net 60." This creates a roadmap that aligns with trust-building.

2. Trading Volume for Time

If you cannot offer a higher price, offer volume security. "We are projecting $50k in spend this year. If I consolidate this volume with you via a blanket order, can we move to Net 60?" You are trading the certainty of future revenue for the flexibility of payment timing.

3. Aligning with Customer Cycles

Be transparent about your own constraints. "My customer pays me in 45 days. I need 60 days from you to ensure I can pay you on time, every time, without cash flow stress." Suppliers often appreciate this operational honesty over vague demands.

4. The "Total Cost" Trade

In high-interest rate environments, cash is expensive. It may be mathematically rational to accept a slightly higher unit price (e.g., +1%) in exchange for significantly longer terms (e.g., +30 days), depending on your cost of capital. Run the math to see if the trade-off preserves your working capital.

What to Say: 3 Negotiation Scripts

Measuring Success: DPO

The key metric to track is Days Payable Outstanding (DPO). This measures the average number of days it takes you to pay your bills.

An increasing DPO generally means you are holding onto cash longer, which improves working capital. However, push it too far, and you risk damaging supplier relationships. The goal is to maximize DPO within the agreed-upon terms, not by paying late.

Red Flags and Risks

While negotiating, be wary of suppliers who demand 100% pre-payment for standard, off-the-shelf commodities. This suggests they may be financially unstable. Conversely, avoid becoming over-reliant on a single supplier's credit line ("The Bank of Supplier"), as a change in their financial policy could suddenly halt your supply chain.