Vendor and Supplier Debt: 5 Ways to Negotiate While Preserving Supply

You can change your payment terms and continue to keep business relations with a vendor. Negotiating with a supplier to move your payment terms from 30 days to 60 days can deliver major improvements to cash flow. It’s important to stay open and honest during this time, even if it’s challenging.

If you have to have a conversation with a vendor that you owe money to, here are five things to try. Start with a phone call before the next due date. Know your numbers, what you can realistically pay, and the path you propose to full repayment. Ask for the right terms that support your budget, and offer something in return for an easier deal. To complete your plan, track the payments you have made and the ones still owed until you have finished the repayment plan.

It may hurt to admit you are unable to pay a vendor. In this situation, however, it is important not to avoid the vendor. If you avoid phone calls or do not return emails, it sends the wrong message to a business that wants a strong partner. If you go quiet on an account and don’t reach out, the vendor might end up pulling their product or stopping supply.

If the supplier gets nervous about your ability to pay, they may demand that you give written assurance of payment. If you don’t comply, they might withhold shipments. If you fail to reply within 30 days, this can trigger a repudiation. If the seller learns that you have become insolvent, it can withhold deliveries unless you pay in cash, including for goods previously delivered. The seller may also be able to reclaim the goods if it demanded their return within 10 days after you received them.

If you know it’s going to be impossible to make a payment, make the call in advance. Don’t wait until the vendor contacts you. It is harder to get more favorable terms if you are already behind on payments. Save yourself the stress and some time by starting the conversation when there is still time. An honest exchange before the payment is due can establish an understanding and support continuing relations.

Calculate What a Reasonable Repayment Schedule Could Look Like

Before you reach out to the vendor, calculate what a reasonable repayment schedule could look like. The financial tool that reflects this the best is your cash flow forecast. It projects how much cash you will have and when. Figure out how much you can pay, even if it is just a part of the total owed to a specific vendor. Don’t overestimate. Be honest. A contract should include clauses that address missed or late payments, including late fees, if they apply. Figure out what penalties apply in your situation. If you have multiple vendors, you have to prioritize which vendor gets how much.

Increase Your Payment Terms

Ask the supplier for a time frame that works for both of you. Tell the vendor how much you can commit to now and how much later. If you need net 45, ask for net 60 days and work out the details. If you want to increase your payment terms to keep cash for longer, you could also ask to reduce the cash you need to place an order or spread the payments over longer. You can split the payments to pay 25% at order, 25% on delivery, and the balance net 30. If you need to stretch out payments over a longer period, ask for installment payments to ease the burden of cash outflow. If your sales are seasonal, you should ask that your payment terms align to your cash flow. Consider what the gap is between when you pay your vendor and when your customers pay you. You want a payment schedule that closes the gap in timing. Before the call, compare the terms they are giving you to those offered by others. Competing offers strengthen your position, and they also provide a backup if needed.

Try to make the conditions so that it’s a win for you and the vendor. Not getting paid is hard on suppliers, too. What you might offer is a commitment to increase your orders. Another tactic could be a longer commitment from your side in exchange for the terms.

Holding onto cash longer is not always free. If you have the cash to pay a bill in 10 days, do you? The credit terms are net 30, but there’s an early-payment discount. By skipping the 2% for early payment, you hold onto your cash for 20 more days. But what does it cost? It amounts to an effective annual interest rate of over 35%. This may be a higher rate than if you used a credit line to cover the expense.

Track the Payments

Once you have payment terms you can agree to, put the agreement on paper. Track the payments you need to make to pay off any balances, along with their due dates. Make sure payments are delivered according to your agreed terms to avoid damaging your vendor relationship. This will allow you to build trust in your ongoing relationship with the vendor. Don’t just pay late. If you squeeze a vendor too hard, it can backfire and lead to losing out. Keep small but critical suppliers happy, or you could lose inventory when they go under.

Make sure that you record the terms offered by each of your vendors. Run an accounts payable aging report regularly to keep up to date with what you owe and when. This can help you manage cash flow better and protect yourself from damaging vendor relationships by sticking to your agreements.

If you are settling a disputed bill, you can send a check that says “payment in full” on it. If the vendor cashes the check, it has likely settled the dispute. There is a catch: if the vendor sends your money back within 90 days, the debt may return with it. If you find a vendor willing to settle for less than what you owe, make sure you understand the tax consequences. If a vendor forgives part of what you owe, this can be taxable income, unless it is excluded for insolvency or bankruptcy and you file Form 982.

The federal Fair Debt Collection Practices Act applies to personal or household debt. It doesn’t cover vendor debt, which is considered to be business debt. If you paid suppliers that you owed, a bankruptcy trustee might be able to claw back the payments made within 90 days before filing, unless a defense such as ordinary course applies.

The strongest position is when you prepare your numbers and reach out when you are not in the desperation phase. Have something to give back to the vendor that will be good for their business, too, like increased orders. Careful tracking of the deal you negotiated allows you to take full advantage of the terms you were given.