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Negotiating supplier and customer payment terms
Payment terms — how long your customers take to pay you, and how long you take to pay your suppliers — are one of the most powerful cashflow levers a company has, and one of the least deliberately used. Shift them a few days in your favour and you can free up cash that would otherwise have to be borrowed; get them wrong and you fund your customers’ businesses out of your own working capital. This piece looks at both sides of the deal, how each moves your working-capital gap, what is reasonable to ask for, and how to negotiate without souring a relationship you need.
Why terms move cash so much
The gap between paying for what you sell and being paid for it is the working-capital gap — the amount of cash a company has tied up in the ordinary course of trading. Two of the three levers on that gap are payment terms: how fast customers pay (your debtor days) and how slow you pay suppliers (your creditor days). Every day you shave off the first, or add to the second, is a day’s less cash you have to find elsewhere. This is the mechanism behind the cashflow gap, by industry, and it is why terms are worth negotiating with real intent rather than accepting whatever is offered.
The customer side: getting paid sooner
On the money coming in, the goal is faster, more reliable payment without losing the sale. Practical moves:
- Set clear terms up front. Agree the payment terms as part of the deal, in writing, before work starts — not after the invoice is disputed.
- Invoice promptly and correctly. A late or wrong invoice is the most common self-inflicted cause of slow payment. Bill the day the work is done.
- Ask for deposits or staged payments on large or long jobs, so you are not funding the whole thing before you see a penny.
- Offer a small early-settlement discount where the cash is worth more than the margin — a modest discount for payment within, say, ten days can transform your debtor days.
- Know your statutory backstop. If a business customer pays late, you have real rights — statutory interest and fixed compensation — set out in the Late Payment Act explained.
The supplier side: paying at the right pace
On the money going out, the goal is to take fair terms that suit your cash cycle — not to pay unreasonably late, which damages relationships and, since April 2025, is increasingly scrutinised for larger companies. Reasonable moves:
- Ask for terms that match your cycle. If you get paid on 45 days, 30-day supplier terms leave a permanent gap. It is fair to ask a supplier to align.
- Trade volume for terms. A supplier who values your order may extend terms in exchange for commitment — a lever worth using deliberately.
- Weigh early-payment discounts. If a supplier offers a discount for prompt payment and you have the cash, the effective return can beat leaving the money in the account.
- Pay agreed terms reliably. The company that pays on the day it promised builds the goodwill that earns better terms next time. Chronic lateness costs more than it saves.
Negotiating without damaging the relationship
Terms are a negotiation, but they sit inside a relationship you want to keep. The tone that works is collaborative, not adversarial: frame it as aligning both sides’ cashflows, be specific about what you are asking and why, and offer something in return — earlier commitment, larger volume, reliability. Ask, don’t impose; a supplier who feels squeezed remembers it. And keep it in writing, so there is no ambiguity later. Done well, better terms strengthen a relationship by making it work for both sides.
When terms are not enough — and finance fits
Payment terms can narrow the working-capital gap, but they rarely close it entirely, and some gaps are structural — a genuinely seasonal trade, a large order that must be funded before it can be billed. When you have pushed terms as far as they will fairly go and a real, short, self-liquidating gap remains, that is where a small amount of short-term company finance fits — sized to the gap, not to a round number. A 13-week cashflow forecast tells you exactly how much and for how long, and working capital vs a term loan helps match the shape of the finance to the need.
The honest summary
Payment terms are a deliberate cashflow lever, not a formality. On the customer side, set clear terms, invoice promptly, ask for deposits and consider early-settlement discounts to get paid sooner. On the supplier side, ask for terms that match your cycle, trade volume for time, and pay reliably to earn goodwill. Negotiate collaboratively and in writing. Terms will narrow the working-capital gap; where a real, short gap remains, finance sized to it — informed by a proper forecast — is the honest way to bridge it.