The customer chose your product or service because they could see value in it. Your customer wants longer payment terms, but they also probably don’t want to lose your products. A few years ago, Whirlpool Corp. made a push to get extended payment terms from its vendor base. Why are extended payment terms preferred over standard payment terms and how to account for these differences when evaluating suppliers will be reviewed and shared in this entry. Extending payment terms to 60 days is unlikely to go down well with suppliers if they are then consistently paid later than 60 days. how quickly payment is to be received). Customers may specify their debtor days in the contract as a stated policy (i.e. If we were able to offer an effective invoice discounting program funded by partners, would that help? Pushing out supplier terms while keeping customer terms short gives firms free cash for other projects. To be able to answer these questions and properly evaluate the above suppliers we need to understand our company’s cost of capital. But it can also increase the financial stress on suppliers and ultimately lead to … Instead of the prevailing 60-day terms, the Michigan-based appliance maker wanted to pay its suppliers in 90 days. When a firm uses trade credit, it is deferring payment to its suppliers as a means of better managing short-term cash flows. Extending Payment Terms. It stinks. They can call the lending institution to find out the name of the recipient. In other words, this is how much of the order value you will pay at various points of time throughout the production process. Below is a sample letter for extension of payment terms. But there is a solution at hand. There may be short term benefits for extending payment terms, but in the long term, it may not be sustainable for your business or your suppliers. Why big companies extend payment terms to suppliers. The benefits of such an arrangement to Whirlpool are obvious, as is the pain it could cause to many in its supply chain. You do have some leverage to bring to the negotiating table. Several supply chain methods can be used to extend the time of actual payment: Invoice terms. Not to mention the negative press. Payment terms is an issue that affects your balance sheets, your reputation, and your supply chain. So before terms are extended, you’ll first need full control over the timings of payments, as well as the ability to approve invoices rapidly. Extended payment terms can be a huge burden for buyers and suppliers. Know their business and how you fit in. The borrower should make sure it is addressed to the right person. Establish Favorable Terms: In terms of cash flow, you and your vendors have conflicting goals. Remember that. In response to the financial recession of 2008, many supply chain and procurement departments began pushing their suppliers for extended payment terms as a means to improve cash flow and limit the need to acquire credit, which was in short supply. This process begins from when a purchase order is placed, through production, to delivery. But what would make the “pain” of extended payment terms easier? Your vendors want to be paid as quickly as possible, while you want to extend the time of payment for as long as possible. It should be written in formal business-letter style and either included with any required forms or sent by certified mail with a return requested. Payment terms are the designated amounts of money you pay the supplier at various points in time. What commitments can I give you in return? We need to extend terms with our suppliers. Extending payment terms to 120 days or more frees up working capital for big companies. They don’t want to find a new supplier. Published on May 18, 2015 May 18, 2015 • 31 Likes • 3 Comments