How to Manage Extended Payment Terms and Negotiate Customer Pushback?

Introduction

In today’s credit landscape, corporate debt is reaching unprecedented levels, with outstanding debt across the USA, Europe, and the rest of the world totaling a staggering $1.2 trillion. To compound this issue, customers are increasingly pushing for extended payment terms, raising concerns about the potential for delinquency and financial strain.

Are you grappling with a surge of requests for extended payment terms?

In this article, we’ll delve into this emerging trend, offering a comprehensive guide on how to navigate and mitigate the challenges posed by extended payment terms. We’ll walk you through a step-by-step process to evaluate such requests, equip you with effective negotiation strategies, and provide insights on safeguarding your business interests in the face of evolving payment dynamics.

What Are Extended Payment Terms?

Extended payment terms refer to the period beyond the standard payment terms defined in a contract within which a buyer is given to settle an invoice. Instead of the typical 30-day payment period, extended terms may extend to 60, 90, or even 120 days. 

These extended timelines can strain cash flow and create challenges for suppliers in meeting their financial obligations. This trend of extending payment terms in recent times has come to be known as a Terms Pushback Strategy (TPS). An increasing number of consultants are actually advising businesses to implement a TPS with their suppliers to conserve cash flow and improve working capital. 

If you have been hit by a longer payment term request or multiple requests from your customers then follow this guide to collect payments, achieve your business goals, and retain your customer relationships.

6 Impacts of Longer Payment Terms 

Longer payment terms can have significant consequences for businesses, affecting both their financial health and operational efficiency. 

Understanding the cost of extended payment terms can help you evaluate the request according to the customer’s financial circumstances and your business goals.

• Cash flow constraints

  Extended payment terms delay the receipt of funds, leading to cash flow constraints for the supplier. This can impair the ability to cover operational expenses, invest in growth initiatives, or meet financial obligations such as payroll and supplier payments.

• Working capital management 

  Prolonged payment cycles tie up working capital, reducing liquidity and limiting the ability to fund day-to-day operations or capitalize on business opportunities. Suppliers may need to seek alternative sources of financing or adjust their working capital management strategies to compensate for the impact of extended payment terms.

• Increased financial risk

  Extended payment terms increase the risk of non-payment or late payment, exposing suppliers to financial losses and liquidity challenges. Suppliers may incur additional costs associated with debt servicing, collections efforts, or credit risk mitigation measures to address the heightened financial risk.

• Reduced profitability 

  Prolonged payment cycles can erode profitability by delaying revenue recognition and increasing the cost of financing working capital. Suppliers may need to adjust pricing or terms to compensate for the impact of extended payment terms, potentially reducing profit margins or competitiveness in the market.

• Operational challenges

  Managing extended payment terms requires additional administrative effort and resources to monitor outstanding invoices, follow up on overdue payments, and pursue collections efforts. This can divert attention from core business activities and increase overhead costs associated with credit management and collections.

• Opportunity costs

  Suppliers may miss out on potential business opportunities or growth initiatives due to limited cash flow resulting from extended payment terms. Delayed receipt of funds may delay investment in product development, marketing campaigns, or expansion projects, impacting long-term competitiveness and profitability.

5 Steps to Manage Extended Payment Terms

Now that we have explored what extended payment terms mean and how they can affect your business, it is time to dive into what suppliers can do to safeguard your business when these requests are made by customers. 

Step 1 – Identify the reason for extended payment terms requests

Before jumping into negotiations, it is essential first to identify the circumstances surrounding a customer’s request for extended payment terms. 

According to Credit Today, 63% of businesses review extended payment terms requests on their individual merits.

This can help suppliers navigate negotiations effectively and maintain healthy financial relationships with their clients. Let’s explore some common scenarios when customers may ask for extended payment terms:

• Low cash flow

  One of the most prevalent reasons customers seek extended payment terms is low cash flow. Businesses may experience fluctuations in cash flow due to seasonal fluctuations, economic downturns, or unexpected expenses. In such cases, customers may request extended payment terms to better manage their financial obligations and alleviate short-term cash flow pressures.

• Budgetary constraints

  Customers may also request extended payment terms due to budgetary constraints. Large capital expenditures or unexpected expenses can strain a company’s budget, making it challenging to pay invoices within standard payment terms. By extending payment terms, customers can allocate funds more strategically and ensure they have sufficient liquidity to cover essential expenses.

• Strategic financial planning

  Some customers may strategically opt for extended payment terms as part of their financial planning or investment strategies. 

  For example, businesses may choose to reinvest capital in growth initiatives or expansion projects rather than allocating it towards immediate invoice payments. By extending payment terms, customers can retain more cash on hand to fuel long-term business objectives.

• Negotiation leverage

  In certain situations, customers may request extended payment terms as a negotiation tactic to gain leverage in supplier negotiations. By extending payment terms, customers may seek to secure lower prices, additional discounts, or other concessions from their suppliers. This approach allows customers to leverage their purchasing power to negotiate more favorable terms and conditions.

• Supplier competition

  Customers may also request extended payment terms if they receive more favorable terms from competing suppliers. In highly competitive markets, suppliers may offer extended payment terms as a way to differentiate themselves and win business. Customers may then use these terms as leverage to negotiate similar terms with their existing suppliers or switch to competitors offering more favorable payment terms.

So, what issues are your customers facing? Once you identify this, you can build a plan of action for negotiations to protect your company’s interests.

Step 2 – Review contracts and agreements

Now, it is time to go back to the original contracts and agreements and crosscheck the payment terms agreed upon.  Why?

This is because before accepting new terms, suppliers must thoroughly understand their rights, obligations, and potential risks. When reviewing these documents, suppliers must look into the following factors. 

• Get clarity on existing payment terms agreed upon between the supplier and customer. This includes details such as the payment due date, invoicing procedures, late payment penalties, and any other relevant terms related to payment.
• Assess the flexibility available in negotiating extended payment terms. Some contracts may have provisions that allow for modifications to payment terms under certain circumstances, while others may have more rigid terms that require mutual agreement for any changes.
• Contracts often contain legal language that outlines the consequences of breaching or modifying payment terms. Reviewing these clauses helps you understand the potential legal implications of agreeing to extended payment terms, such as forfeiting rights to collect interest on late payments or facing penalties for non-compliance.
• Reviewing contracts allows you to assess the financial impact of extending payment terms by considering factors such as interest costs, opportunity costs, and potential strain on working capital.
• Contracts may also outline risk factors associated with extending payment terms, such as the financial stability of the other party, potential changes in market conditions, or regulatory compliance issues. Reviewing these risk factors helps you evaluate the potential risks involved in agreeing to extended payment terms and take appropriate mitigation measures.
• Reviewing contracts ensures that any proposed changes to payment terms comply with the terms and conditions outlined in existing agreements. This ensures compliance and helps avoid misunderstandings or disputes arising from conflicting terms in different contracts or agreements.

Armed with a clear understanding of existing contractual terms, you can develop a well-informed negotiation strategy for discussing extended payment terms with the other party. This may involve highlighting mutual benefits, proposing alternative solutions, or leveraging any contractual provisions that support your position.

Step 3 – Evaluate when to say yes and no to extended payment terms

When it comes to negotiating extended payment terms, striking a balance between accommodating client needs and safeguarding your business’s financial health is paramount. The next step in this process is evaluating when to say yes to proposed terms, as well as when to stand firm and assert your business’s interests. 

Assessing the benefits

Before accepting proposed payment terms, carefully evaluate the potential of longer payment terms benefits that the client offers to your business. Consider the following factors:

• Value of the client relationship 
• The potential for future business opportunities 
• The impact on cash flow and profitability.

Example: Accepting longer payment terms from a client may be justified if it secures a substantial contract that significantly boosts revenue and enhances long-term profitability.

Building relationships

Flexibility in payment terms can be a powerful tool for nurturing positive client relationships and fostering loyalty. By accommodating client needs and demonstrating a willingness to work together, you can strengthen trust and goodwill, laying the foundation for long-term partnerships.

Example: If a longstanding customer that amounts to a large percentage of your receivables requests extended payment terms, you might want to consider saying yes, as this will build a better relationship with them going forward.

Client history

Before making any decisions, it is crucial to understand the client’s history with you. This gives insight into whether or not you should consider extended payment terms or not.

Example: If a client has an agreement of Net 30 with you but has been paying late only after 60 days and wants to extend their payment terms to 60 days, then you aren’t really missing out on much. It makes sense to agree to their new terms without resistance in situations like these and retain a good relationship with them.

Strategic considerations

In certain situations, saying yes to proposed payment terms may align with broader strategic objectives or business goals. 

Example: Accepting extended payment terms to secure a high-value contract or penetrate a new market may yield long-term benefits that outweigh the short-term impact on cash flow.

Mitigating risks

When considering whether to accept proposed payment terms, it’s essential to assess the potential risks and implement strategies to mitigate them. This may include implementing stricter credit policies, diversifying client portfolios, or securing collateral or guarantees to protect against non-payment or default.

Example: If a company’s payment history and credit score are not ideal, then consider asking for collateral or a guarantee with regard to extended payment terms. 

Setting boundaries

While flexibility is important, it’s equally crucial to establish clear boundaries and non-negotiable terms to protect your business’s financial interests. Identify key areas where compromise is unacceptable and communicate them effectively during negotiations.

Example: Set up minimum payment thresholds, late payment penalties, or credit limits to ensure your business requirements are not compromised. 

Step 4 – 12 expert strategies to negotiate extended payment terms

When faced with customers who are extending their payment terms, negotiation can play a key role. However, before discussing with your customers, it is important to have an arsenal of strategies at your disposal to utilize in different situations. Here is our expert-recommended arsenal of strategies:

• Reiterate the original agreement

  Remind the client of the initial terms agreed upon in the contract or quote. Emphasize that any extension of payment terms may result in an increase in the quoted amount to account for the extended payment duration.

• Advance billing

  One strategy you can try is to Invoice clients earlier than usual to compensate for potential delays in payment. By sending invoices well before the payment due date, businesses can mitigate the impact of late payments on cash flow. Even if you don’t actually do it, suggesting this to the customer can urge them to stick to the original terms of the agreement.

• Pushback is enough

  Simply expressing reluctance or resistance to extended payment terms may prompt clients to reconsider and agree to more favorable terms. Sometimes, assertiveness alone can lead to a successful negotiation outcome. Many companies are trying their luck and don’t actually want to spend resources on negotiations.

• Highlight your unique value

  Emphasize the unique value proposition that your business offers compared to competitors. Highlight factors such as quality, reliability, customer service, or innovative solutions to justify why clients should prioritize timely payments to maintain the relationship. However, this must be done gently to not negatively affect your relationship with your customer.

• Know your competitors

  Research and understand the offerings and pricing strategies of competitors in the market. Knowing your competitors’ terms and incentives can help position your business more competitively and provide leverage during negotiations.

• Early payment discounts

  Offer incentives such as discounts or rebates for early payment to encourage clients to settle invoices promptly. This strategy benefits both parties by improving cash flow for the supplier and reducing costs for the client.

• Offer installment plans

  If the client cannot pay immediately, allow clients to pay in installments rather than a lump sum. This approach mitigates the risk of non-payment and provides a predictable revenue stream for the supplier.

• Speak to the client directly

  Engage directly with key decision-makers or the procurement team responsible for approving payment terms. Building rapport and addressing concerns directly can facilitate more favorable negotiation outcomes, as the accounts payable teams usually have different targets and priorities.

• Supply chain financing agreement

  Explore supply chain financing options, such as invoice factoring or supplier financing programs, to expedite cash flow and minimize the impact of extended payment terms on working capital.

• Different price-lists

  One tried and tested strategy is to respond to extended payment terms with different pricing lists. Different price lists can be a strategic tool for suppliers to manage extended payment terms:

  Tiered Pricing Structures: Suppliers can implement tiered pricing structures based on payment terms. For example, customers who agree to standard payment terms receive one pricing tier, while those requesting extended payment terms are placed in a different tier with slightly higher prices. This incentivizes customers to adhere to standard terms while still accommodating those with specific payment needs.

• Invoke the Robinson-Patman Act

  The Robinson-Patman Act, enacted in 1936, primarily focuses on preventing anti-competitive practices in the marketplace, particularly discriminatory pricing by sellers to different buyers. While the act doesn’t directly address extended payment terms, its provisions can indirectly assist suppliers in dealing with such terms:

  For example – Price Discrimination Prohibition: The act prohibits sellers from discriminating in price between different purchasers of commodities of like grade and quality, where the effect is to injure competition. Suppliers facing pressure to offer extended payment terms to certain buyers could potentially argue that such terms result in unfair pricing discrimination, especially if the terms disproportionately benefit specific buyers over others.

• Utilize AI and automation

  Implement AI-driven collections management software to streamline payment term negotiations and automate routine tasks such as collections worklist prioritization, automated dunning, and advanced real-time reporting dashboards. Leveraging technology can improve efficiency, accuracy, and decision-making in managing payment terms.

  Always strive to find mutually beneficial solutions that address both your business’s needs and the client’s requirements. Collaborative negotiations that focus on finding common ground and exploring creative alternatives can lead to outcomes that satisfy both parties and strengthen the partnership.

Step 5 – Communicating with your customer

When communicating renegotiated payment terms with a customer who has requested extended payment terms, it’s important to approach the conversation with empathy, understanding, and professionalism. Here’s how to do it effectively:

• Acknowledge the request: Start by acknowledging the customer’s request and express appreciation for their openness in discussing their financial situation.
• Explain your position: Clearly explain your company’s perspective and the reasons why the extended payment terms might not be favorable. 
• Highlight the impact: Emphasize the potential impact of the extended payment terms on your business, such as increased financial strain or operational challenges. Help the customer understand the importance of finding a mutually beneficial solution.
• Propose alternative terms: Offer alternative payment terms that address both the customer’s needs and your company’s requirements by utilizing the strategies mentioned in step 4. 
• Provide justification: Provide justification for the proposed terms, explaining how they align with the customer’s financial capabilities while also ensuring that your company’s needs are met. Use data or examples to support your argument.
• Discuss options: Be open to discussing alternative options or negotiating the terms further. Encourage the customer to share their thoughts and concerns and be willing to adjust the proposal if necessary.
• Clarify expectations: Clearly outline the new payment terms, including any changes to due dates, payment amounts, or other relevant details. Ensure that both parties have a clear understanding of their responsibilities moving forward.
• Address concerns: Address any concerns or objections the customer may have regarding the proposed terms. Listen actively, validate their concerns, and offer solutions or compromises where possible.
• Confirm agreement: Once the renegotiated terms are agreed upon, confirm the agreement in writing. Provide a formal document outlining the revised terms and ask the customer to acknowledge their acceptance.
• Maintain open communication: Keep the lines of communication open throughout the process and beyond. Encourage the customer to reach out if they have any questions or concerns and be responsive to their needs.

How AI and Automation Can Help With Extended Payment Terms 

Today, AI and automation have the potential to revolutionize collection processes. If you are not leveraging the latest technology, then the chances are you will be left behind by those embracing the most advanced technologies to drive incredible results.

Introducing HighRadius collections automation software:

HighRadius offers innovative technology solutions designed to revolutionize collections management processes and drive efficiency and effectiveness in cash flow management. Explore how businesses can leverage HighRadius technology to streamline collections, improve communication with customers, and optimize financial performance.

1. Autonomous receivables platform

   HighRadius offers an order to cash software that combines multiple modules, including credit, collections, deductions, electronic invoicing, and cash application, into a unified solution. This integrated approach streamlines collections management workflows, enhances data visibility, and improves collaboration across departments.

2. AI-powered collections management

   HighRadius leverages artificial intelligence (AI) and machine learning algorithms to automate collection activities and prioritize accounts based on the likelihood of payment. AI-powered collections management identifies patterns of delinquency, predicts customer behavior, and recommends optimal collections strategies for each account. 


• AI prioritized worklist: Utilizes AI algorithms to prioritize accounts based on various variables, enabling collectors to focus on high-impact collections activities.
• In-app dialer: Simplifies calling processes with one-click dialing and automated transcription, increasing call time and productivity.
• Intelligent email inbox: Centralizes collections emails, automates email actions, and tracks email interactions, enhancing communication efficiency.
• Advanced dunning: Automates common collection activities, such as sending account statements and past-due notices, improving collections outreach.
• Generative AI via FreedaGPT: Empowers collectors with AI-driven insights and auto-responses, streamlining email operations and report generation.
• AP portal automation: Automates invoice tracking and payment status monitoring, reducing manual efforts in managing accounts receivable.
• In-app payment acceptance: Enables customers to pay directly through email links or dynamic payment links, expediting the payment process.
• Dispute management: Facilitates dispute resolution by logging and tracking disputes, streamlining the resolution process.
• Proof of delivery automation: Automatically links proof of delivery to invoices, accelerating dispute resolution and enhancing customer satisfaction.
• ERP connectivity: Integrates with ERP systems to sync relevant data, providing collectors with real-time information for informed decision-making.
• Collection agency cases integration: Facilitates collaboration with collection agencies, enabling seamless tracking of collection activities.
• Customer master hierarchy extensibility: Allows flexible management of complex collection hierarchies without ERP data changes.
• Activity logging and tracking: Logs all collection activities for comprehensive account history review, enhancing decision-making.

By leveraging HighRadius technology, businesses can streamline collections management processes, enhance communication with customers, and optimize cash flow. With AI-powered collections management, automated workflows, and real-time reporting capabilities, HighRadius empowers businesses to drive efficiency, effectiveness, and success in collections management.

FAQs

1) What is an example of extended payment terms?

An extended payment terms example is when a supplier extends a line of credit to a customer on set payment terms. However, the customer later extends the payment deadline for goods or services from the standard 30 days to 60 days, 90 days, or even 120 days for paying an invoice.

2) What is a prolonged payment?

When a supplier extends credit to a customer, they agree upon certain payment terms which is usually 30 days. A prolonged payment refers to a delayed settlement of an invoice beyond the original payment terms, often extending the standard payment period, to a longer timeframe, causing cash flow issues.

3) What are 90 day payment terms?

90-day payment terms refer to an agreement between a buyer and seller where the buyer has 90 days from the invoice date to settle the payment for goods or services received, extending beyond the standard 30-day payment period.

4) What is payment terms pushback

Payment terms pushback is a strategy where buyers request extended payment periods from suppliers, shifting from standard terms like Net 30 to Net 60 or 90 days. This practice helps buyers manage cash flow but can strain suppliers’ finances.