5 tips for coping with long payment terms

According to a study commissioned by Suomen Yrittäjät, the pandemic has further extended the payment terms for business-to-business transactions. Businesses regardless of size need to increase and maintain their own cash buffer, and one way to do this is to require longer payment terms for purchase invoices. The extension of payment terms usually leads to a domino effect, with small operators, who simply cannot afford to wait for trade receivables to be credited to their bank account, suffering the most.

The average payment times for PURO customers are 24.4 days. Payment terms are usually extended if customers are partially or completely abroad. For example, it is common for Central European buyers to require payment terms of up to 50-60 days for their invoices.

Large companies have extended payment terms the most, but the impact of the corona crisis is also reflected in the need for smaller companies to extend their payment terms. Almost without exception, small businesses are the ones that need to adhere to larger companies’ demands in negotiations on payment terms. While offering longer payment terms can at best be a tactic for better customer service and a competitive advantage, long payment terms can also, at worst, pose challenges for businesses to sustain their own business. Every company should strive for a situation where money from customers lands on their bank account before due dates of purchase invoices from suppliers or subcontractors.

"Nearly a third of companies have lost money because customers have stretched payment terms." Entrepreneur Gallup by Suomen Yrittäjät.

Foresight and risk management as part of cash flow management

Cash flow management essentially includes also foresight and risk management. In addition to the fact that it is good for a company to find out what potential benefits and competitive advantage extension of payment terms could bring to the company in relation to competitors, it is also good to look at customers' wealth and creditworthiness.

The risk of long payment terms can also be anticipated. Even if cash flow is flowing at the moment, the company should not be blinded by a good economic situation but should also be prepared for the future. Especially in situations where the continuity of cash flow depends on one or a few large players, it is justified to introduce anticipated ways to manage potential risks related to longer payment terms or customer payment difficulties.

One way to manage cash flow and anticipate potential risks is to finance your invoice receivables and receive the money on your bank account immediately after sending the invoice. Financing invoice receivables has provenly shortened both customers' payment terms and payment delays.

During 2020, payment delays for PURO's customers halved from 5.9 to 2.9 comparing to a year ago, and payment time was reduced by an average of 3.4 days. A flexible financial service that adapts to the needs of the company can achieve concrete results in speeding up and securing cash flow.

Tips for coping with long payment terms

Almost a third of the companies that participated in the survey commissioned by Suomen Yrittäjät (Entrepreneurs in Finland) replied that they had suffered financial damage as a result of customers' demands to stretch their payment terms. If a company is in trouble with running its own business, it may primarily seek to negotiate payment terms with its customers. In many cases, however, the bigger party dictates the payment terms. We put together a few tips for coping with long payment times:

1. Diversify your customer relationships to larger and smaller players and billing for shorter and longer payment terms. That way you can keep the wheels spinning and not be tied to one big customer.

2. Do not get fooled by unfair demands. By default, according to terms set in 2015, due date for invoices may be longer than 30 days only if a separate agreement has been made between the seller and the buyer.

3. Introduce a payment method discount to encourage shorter payment terms, e.g. 30 days net 14 days -5%. In practice, this means that the customer is granted a 5% discount on the total invoice if the customer pays the invoice within 14 days when the final due date of the invoice is 30 days.

4. Don’t rely your future investments upon trade receivables and miss growth opportunities. Finance large equipment investments as well as smaller IT investments with the help of a financing provider for which the financing objects act as collateral. This allows you to grow your business no matter how fast your cash flows in. You can also finance investments through PURO, contact us and we will help you get started.

5. Fund your invoice receivables and receive the money on your bank account immediately after sending the invoice. In factoring financing, sales invoices act as collateral for the financing, the risk of the invoices is transferred from the company to the finance provider, and the customer gets the payment time he needs. Did you know that you can also finance foreign customers and currencies through PURO?

Become familiar with financing options with PURO.