Tips for negotiating better payment terms

A common gripe among SMEs is the sluggish payment terms many big businesses impose on them. However, it is possible to negotiate these terms with even the biggest corporations.

“One of the biggest problems that small businesses have is cash flow, [but] large companies don't seem to care,” says Mikel Lindsaar, founder of web development company reinteractive.

“I remember the first discussion we had with a very large customer of ours. They said: ‘Our payment terms are 45 days after the end of the month that you issue the invoice.’ I went: ‘Hang on. If I issued the invoice on the 1st of January, you're going to pay me on the 15th of March?’. They went: ‘Yeah, that's our payment terms’.”

However, unwilling to roll over and accept such unreasonable terms, Mikel pushed back against the customer for a more reasonable arrangement.

“I said: ‘We actually can't start work until payment is received’. They went: ‘Okay. Then we can't do business’. [But I replied] ‘We can … we'll invoice you today and then we'll start working 45 days after the end of the month the invoice was issued’.”

Unsurprisingly, the customer was not happy with this situation, but Mikel then explained why he objected to their initial payment terms.

“I said: ‘Look, we're not a bank, we can't afford this. We need better payment terms’. They actually went: ‘Oh, okay’.”

The end result, Mikel explains, is that he did indeed get this customer – a household name in Australia – on board, and they prepaid all work in full.

“They would pay us four weeks up front before we started,” he says.

However, this situation wasn’t a one-off for Mikel. Reinteractive works for many well-known companies, including Westfield and Qantas. Mikel says it is possible to negotiate with such big companies, provided you get your ducks in a row first.

“One of the ways you can do that with cash flow is to be in a good position. Be a known, high-quality organisation. Be needed,” says Mikel.

“The other thing you can do to encourage it ... Another very large customer of ours who's fantastic with payment terms, one of the things they mentioned is: ‘We pay you in advance because you give us a discount for it’.

“One of the things we do is we offer a 10 per cent pre-payment discount. If the full payment of the invoice is received before work begins, we give them a 10 per cent credit note.”

While some may consider this tactic useful specifically when dealing with much smaller customers, where cash is tight, Mikel says it is also very appealing for big businesses.

“When you're talking a large chunk of money, that [discount] becomes a large chunk of money. If you can get that communicated to the finance people, they love it,” he explains.

“The product owners, they're a bit disconnected from the finance. We encourage that. That's how we handle our cash flow. A lot of these large organisations are like two months after invoice, or three months after invoice. Then they forget and then it has to go in the next payment round.”

Mikel says another good tip for improving your cash flow is to become friends with your customer’s accounts payable person, and go out of your way to make their job easier.

“Give them a call and get to know them and say: ‘Is there anything that we can give you to make the payment process smoother? I'm just calling up to make sure that you've got all of our account details correct, because I wouldn't want to create double work for you. When I send you invoices, is there anything you need on the invoice? Would you prefer the purchase order number to be more highlighted or bolder? Or is there anything we can do to make your life easier?’,” he says.

“Most people don't get paid because they're not chasing their debts. There are ways if [you are] proactive and get engaged early. That's what we get our guys to do and it works really well.”

Hear from Mikel about cash flow, remote working and more on the My Business Podcast!

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