Before you agree to longer payment terms

A large customer asks to move from 30 days to 60. Sometimes to 90. It is framed as a policy, an alignment with group terms, something that is simply how they do things.

What is being asked for is a loan. You deliver, you pay your own costs, and they hold your money for an extra month or two. Whether to grant it is a commercial decision like any other, and it should be priced.

Work out what it costs you

The arithmetic is simple and almost nobody does it.

Take the monthly value of what you supply them. Multiply by the extra months you are being asked to wait. That is how much more of your money is tied up in this customer, permanently, for as long as the relationship lasts.

Then ask the only question that matters: where does that money come from?

• From cash you are sitting on — then the cost is whatever else that cash would have done.
• From an overdraft or a loan — then the cost is the interest, and you can state it as a figure.
• From paying your own suppliers later — then you have passed the problem down and will pay for it in their prices or their patience.
• From nowhere — then you cannot afford the terms at this volume, and that is the answer.

A business can be profitable on every order and still fail because of this one. Growth makes it worse, not better: more volume on longer terms means more money tied up, which is why the month you win your biggest contract is often the month cash gets frightening.

What to ask for in return

If you are being asked to extend credit, ask to be paid for it. Reasonable asks, roughly in order of how often they are agreed:

• A price adjustment. You are financing them; the price reflects it. This is the most honest version and often the easiest to agree, because their procurement team can approve a price but not a terms exception.
• An early settlement discount. They keep the option of 60 days, you offer a small discount for 30. Many large buyers take it, because their own finance team is measured on margin too.
• A deposit or staged payments on larger orders, so you are not funding the whole thing.
• A guaranteed minimum volume. If you are carrying their financing, the relationship should be worth carrying.
• Interest on overdue amounts, with a clear trigger. Longer terms are one thing; longer terms that are then also missed are another.

Three things to check before you agree

Does the clock actually start where you think? Sixty days from end of month of invoice receipt is not sixty days. Read the trigger, then count it out on a calendar.

What is their payment run? Many large organisations pay on fixed days. If the due date falls the day after a run, you wait for the next one. Ask when the runs are and get your invoices in ahead of them.

How concentrated are you? If this customer is a large share of your revenue, extended terms are not just a cash issue, they are a dependency issue. The question is not only whether you can fund it but what happens if they are late, or stop.

The thing not to do

Do not agree verbally in the meeting and work out the consequences afterwards.

This is a change to the commercial terms of the relationship and it deserves the same treatment as a price change: worked out first, agreed in writing, and reflected in the document. “We’ll make it work” is a decision to absorb an unknown cost.

This note is general information, not advice on your situation, and it is not legal advice. If a customer is pushing for terms you are not sure you can carry, and you want the position worked out before you answer, that is work we do.