Startups • August 24, 2021
How to Negotiate Payment Terms with Suppliers
At first, supplier negotiation might seem like it’s all about finding the cheapest price. The truth is, there are lots of other factors to consider too. A strong, long-term agreement has to benefit both you and the supplier, and you’ll both come to the table with some “must have” requirements for the deal.
Your priority should be to make sure everything is checked off your list.The key to making this happen is to avoid getting intimidated by the supplier. Create a non-negotiable list, and always refer back to it. When the negotiations are done, both sides should feel comfortable with the final agreement.
So, how do you get started? Well, it’s a good idea to begin by learning more about your suppliers. Find out how valuable your business is to them, what your competitors are paying, as well as the prices being offered by the suppliers’ competitors. This information will give you leverage during negotiations.
Also, consider asking the supplier if they’ll match their competitors’ pricing. If they’re willing to price match, you’ve probably found your best option. After that, the process should go more smoothly – leave a deposit or a down payment, and figure out the terms of your agreement. Whenever possible, it’s a good idea to try to pay your supplier in their preferred currency.
Tip #1: Understand Your Supplier
Start by researching potential suppliers. Your business might be more valuable to them than you think. This is where bargaining power comes into play. If a supplier has a monopoly, you could have a harder time reaching a deal. Why? Because they already have plenty of business, and they have fewer competitors for you to use as leverage.
Alternatively, if a supplier has lots of direct competition, your bargaining power is increased. Bring multiple quotes from their competitors with you to the negotiation table, and you can easily talk a supplier down to a reasonable cost for their services.
How to Manage a Monopoly
Some significant challenges faced by companies while negotiating with monopolies include:
- Supply dependency: Only one supplier provides a product that you need. These could be things like a specific utility, or a patented product, such as software. This creates a supply-side risk to your business.
- Transition costs: These are the reasonable costs and expenses of providing the service/supply to you. The supplier usually has the upper hand when you’re building a long-term deal with them, which can lead to transition costs being higher than you’re expecting.
- Financial risks: When a company is the only game in town as a supplier, they may be tempted to set premiums on their products. After all, what else can their customers do but pay? Then, you’re faced with two choices – keep paying the exorbitant fees indefinitely, or walk away and discontinue any product that relies on the monopoly supplier.
But, if the supplier pushes their pricing too far, their customers will be forced to walk away, and suffer the financial loss of no longer being able to carry that product.
If a customer doesn’t want to risk that, and they’re willing to pay the supplier whatever fees they want, there’s the chance that a critical number of their customers will walk away. Then, the supplier may go out of business. Either option to stay or leave a monopoly supplier, creates a substantial risk for you.
You’ll have a better chance to negotiate terms on a worthwhile deal with a monopoly if you:
- Choose the right time to enter the market, when conditions favor you. If the supplier is going through financial hardships, or has recently lost clients because of economic factors, you can leverage this to your advantage during negotiations.
- Show the supplier how costly it would be to lose you as a customer. Always provide financial data to support your position.
- Develop a strategic partnership with the supplier that benefits both parties.
If you’re lucky, a direct competition supplier might already be prepared to offer you a good deal, because they’re trying to increase their market share.
Tip #2: Price Matching
A big part of negotiating is price matching. Good suppliers are willing to match their competitors’ prices. If your company finds a better price, it’s up to you to present that information to the supplier. Usually, a supplier that’s willing to match another supplier’s price, has the ability to lower their prices without losing money.
Most suppliers don’t want to lose business just because a customer found a cheaper supplier. However, some suppliers may not be flexible on their prices, because they anticipate that other businesses will pay what they’re asking.
It’s vital to understand how much flexibility your supplier has with their pricing, as well as how committed they are to reaching an agreement, before you start negotiations.
Some suppliers simply won’t price match, because they believe their higher prices are justified by better quality. If you’ve done your research, you’ll know whether or not this is true, and you can leverage that information to your advantage. If they’re unwilling to budge when you negotiate terms, you need to decide whether it’s best for your business to try and make the deal work, or if you should walk away.
On the other hand, a supplier may be worried about losing their existing business relationships. For most suppliers, it’s more cost-efficient to keep their existing customers, than to invest in new customers.
If you’re an existing customer looking to renew your agreement, you may be able to leverage this to negotiate lower prices, longer payment terms, or a better ROI. They can’t afford to lose your business, so you can use that to sway negotiations in your favor. They’ll be more likely to price match, and give you the best deal possible, to guarantee they keep your business.
Tip #3: Lead With a Deposit
Even though your company is the one requesting the initial negotiation, the supplier is actually the one taking a risk.
Their goal is to deliver a quality service, and get paid fairly for it. Offering a large deposit or downpayment to a supplier, could encourage them to offer you a better price. If a supplier notices you’re very confident with your payments, and your commitment to the new partnership, they’ll be more flexible when you’re negotiating the remaining payment terms and final price.
Tip #4: Pay in the Supplier’s Preferred Currency
Most of the time, there are hidden fees associated with paying foreign suppliers in USD, resulting from banking fees, currency conversions, and other hidden costs. By paying in the supplier’s local currency, you can actually save money, and get more out of what you’re spending. It’s also considered a sign of respect and consideration to the supplier.
Generally, US companies will pay a premium to their foreign suppliers without even realizing it. To offset banking fees and price fluctuations caused by converting USD to their local currency, foreign suppliers will build a buffer into their prices, to keep their margins within an acceptable range. A typical offshore supplier will charge two percent or more above the actual costs to cover the discrepancies.
Often, US companies paying in a foreign supplier’s local currency can negotiate extended payment terms. Foreign suppliers prefer shorter payment terms for cash flow purposes, and it helps minimize currency-value fluctuations. However, the supplier will probably be more likely to extend payment terms, if you agree to pay in their regional currency.
Tip #5: Negotiate the Terms in Your Favor
There are four goals to consider when thinking about how your business can negotiate the best payment terms:
1. Earning Discounts on Purchases
Generally, it’s assumed that the price quoted to you by a supplier isn’t the actual cost of the item/service you’re buying. Overhead, profit margins, customs duties, logistics and shipping, etc. need to be taken into account. The majority of those costs are built into your purchase. But, there’s always some wiggle room.
If you can approach a vendor with terms that are very beneficial to them, they might be willing to discuss a volume discount that reduces your cost per unit. A hefty deposit, longer contract duration, or the promise to increase purchases in the future, are great options to bring to the table.
Mention that you’re also willing to pay them in their local currency, and there’s a good chance they’ll be willing to accomodate, or at least, compromise.
2. Extending the Payment Terms With Suppliers
Most suppliers prefer shorter payment terms for cash flow purposes, and to help minimise currency-value fluctuations. As a business, you want to have the largest margin possible between your income and paying bills. When you sit down to negotiate, ask for as much as you can. If they want 30 days, and you want 60 days, maybe you can compromise on 45 days.
Try mentioning ways that more generous terms could benefit them too. More cash at your disposal may allow you to increase the volume of your orders. Or, you could share some positive word-of-mouth about them to your peers. It’s a win-win, and a useful negotiation tactic.
3. Fixing the Payment Amounts and Settlement Terms
It’s a reasonable suggestion, really. You want to make things as easy as possible for your suppliers. Therefore, spell out everything clearly in the deal This includes risk-mitigation strategies like:
- Locking in currency values at an agreed rate
- Offering a convenient, predetermined monthly billing amount
- Ensuring that the settlement terms are fixed
- Setting stipulations that both sides act in good faith, in case there’s ever a dispute.
Giving certainty to a supplier helps them manage risks and guarantees cash flow. Together, those factors will make them more willing to negotiate.
4. Improve Your Partner Relationships and Communication
Finally, it’s extremely important to be upfront with your suppliers. The need to negotiate or renegotiate payment terms doesn’t happen unexpectedly.
You need to be proactive with your wants and needs, and don’t approach suppliers in a panic. The worst time to start a negotiation is when you’re desperate. It’s in your best interests to take your time. Start the process early enough that you can get what you need, before you actually need it.
Remember that you’ll get farther by treating this as a win-win for both of you, and holding the discussion in a friendly manner. You both need one another to be successful, so there’s no sense in getting upset if the conversation doesn’t go the way you’re hoping.
As we discussed, offering to pay in a foreign supplier’s local currency is a sign of respect and loyalty. Most suppliers will actually consider this a huge benefit. They’ll know exactly how much you’ll be paying at each transaction. This gives everyone peace of mind, and starts your relationship with them on the right foot.
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