Whether you’re new to negotiating, or you’ve been closing deals for decades, the issue of payment terms can affect any one of us. Being unfamiliar with payment terms and how they affect a business, can leave both newbies and seasoned professionals equally stumped. 

It’s important to get to grips with these details before entering into a negotiation, to ensure a successful outcome for all. 

To help you do just that, here are 12 tips for negotiating payment terms.

What Are Payment Terms?

Negotiating payment terms can seem daunting if you’re not overly familiar with what they actually are. Being aware of payment terms is key to understanding how to negotiate better commercial deals with your clients. 

Put simply, payment terms are specific conditions surrounding the payment aspect of a deal. 

Why Are Payment Terms Important?

As with anything relating to business, it’s important to try and be as resilient as possible against risks. Knowing how to negotiate payment terms will mitigate some of the financial risks associated with a deal, especially in negotiations with bigger companies.

Payment terms and cash-flow management are essential ways of managing the financial sustainability of any business.

For example, in April 2020, a survey by the Association of Practising Accountants (APA), revealed that more than half of owner-managed businesses in the UK would run out of cash within 12 weeks, due to lockdowns. Figures from a survey by the Institute of Chartered Accountants in England and Wales (ICAEW) show that SMEs have been taking action to manage cash flow and defer tax payments where possible in order to keep afloat.

Reports like the one above are a stark reminder that businesses need to negotiate solid payment terms within a sale. Leaving your business wide open to the negative effects of external cash-flow factors and without agreed terms, is only asking for trouble.

Top Tips For Negotiating Payment Terms For Buyers And Sellers

1. Keep Your End Of The Bargain 

If you’ve agreed to complete a piece of work by a specific time, make sure you stick to it after the deal is negotiated. Starting off on the wrong foot, early on, can make conflict resolution much harder down the line, especially when you need the cash.

2. Keep Your Initial Terms Simple

Starting with clear, comprehensive, and easy to understand terms, will avoid any “open to interpretation” issues later on. This is often a source of conflict when invoices are presented by suppliers and the customer doesn’t agree that the service has been delivered.

3. Break It Down Into Smaller Pieces

Breaking a contract down into smaller chunks can be a great way of structuring a contract and your payment terms. This dramatically improves cash-flow and helps keep your delivery teams on-track.

4. Know Your Client

Ask yourself if this is the right company to deal with. A salesperson can become swept up in the process of a sale without analysing whether it’s a good deal for both sides. Work with Finance to do your due diligence before the deal is signed.

5. Prioritise Your Key Objectives

Know what you want to achieve during the sale and which payment terms you would be happy to accept. Salespeople will sometimes take any sale as a win, without putting enough thought into how payment terms will affect their overall cash-flow.

6. Ask Questions And Understand Your Counterparty’s Motives

Are there any issues that you may need to be aware of? Does the client have cash-flow issues, either currently or in the past? Are they wanting to build a long term business relationship? All of this will have an impact on the elements you may add to a clients’ payment terms.

7. Always Start with a One-Page set of Principles

Use this as a draft of what both parties would like to achieve. Documenting the basics will allow you to build a formal agreement later on. It will also allow both parties to see whether they are making any progress with negotiations.

8. Do The Maths

Make sure that you’re aware of how volume-discounts will affect overall profit margins. Elements such as early payment discounts can be an enticing way of closing a sale, but can have detrimental effects on profit margins.

9. Be Reasonable

Don’t let your ego get in the way of closing a sale with agreeable payment terms. Remember that the client isn’t usually aiming to obtain every discount available, they’re simply looking for the deal which makes most commercial sense and manages risk.

10. Do Your Research

Don’t just rely on gut instinct or years in the industry to influence negotiations. Taking the time to look at how different payment terms affected similar clients will give you insight into how to successfully negotiate terms. Providing your new clients anonymous examples of current clients and how their payment terms work, can provide enough confidence to close a deal.

11. Don’t Be Ruled By Emotion

Even if you personally wouldn’t have signed off on specific payment terms, you need to be representing your business as a whole. Offering payment terms that you know would benefit both your company and your client, must take priority over your own feelings about the deal.

12. Don’t Rush The Process

Taking the time to explain each element of the contract and payment terms will mean there’s less stress in the future. Showing your client that you’re open and honest will instil a level of confidence within the client.

Terms On An Invoice To Be Aware Of

While not necessarily a negative, it’s always a good idea to be aware of certain phrases often contained within a contract. If a salesperson is unaware that these elements have been included, it can easily derail the sale that they believed they had made.

  • Cash Discounts For Early Payments – if a client decides to pay early and receive a discount, it’s good for your cash-flow. However, this will affect the amount of profit you make from the sale.
  • Net 30 – Payment is due 30 days after the date of the invoice. Note, this is not the same as 30 days after the customer has recorded the invoice on their accounts payable system.
  • Recurring Invoice – This would always be agreed up-front in any negotiations. This means that you would invoice a client for the same amount each month for an agreed period of time. Check and update these invoices in case any additional work has been required during a specific month.

Conclusion On Negotiating Payment Terms

Making your team aware of the implication of payment terms will point them in the right direction from the start. But sales negotiation training and coaching can to help salespeople and account management teams win even more profitable deals. Teaching your team how to negotiate payment terms with suppliers will stand them in good stead for the future.