Finance Guides

SMEs are often strapped for cash. Cash flow issue is amongst the biggest obstacle to business growth. Several reasons which contribute to this include high operating cost and late payment by customers/clients. Whilst curbing cash flow problems is essential in keeping the finances of your business healthy, improving cash flow is no easy task. One of the levers that businesses can employ to ease cash flow problems is to bargain for better payment terms with your suppliers.

1. Relationship is Key

Building and maintaining an amicable relationship with your supplier is one of the most effective “tools” when it comes to bargaining for better payment terms. On top of that, trust is also important to ensure good relationship with your suppliers. By engaging with your suppliers regularly and paying them in a timely manner, suppliers will perceive your business as credible and trustworthy.

Delaying payment is often the main culprit in the erosion of supplier goodwill. This may result in slower delivery times, less willingness to fix defects, slower responses to queries and more onerous payment terms. Sometimes, paying early may yield substantial benefits for you – especially in situations where your suppliers offer discounts or rebates for early payment.

Furthermore, when negotiating for better payment terms, one should always have the end goal in mind. Although it is important that you get to pay suppliers later, pushing for extended payment terms might be detrimental to your relationship with your supplier. This is the most undesirable outcome of a negotiation. Hence, you should be prepared to make concessions during negotiations to preserve your relationship with your supplier.

After your fruitful effort in maintaining a good relationship with suppliers, be sure to mention it during negotiations. Emphasize how much the extended payment term will ensure the continuity of such positive relationship.

2. Know Who to Talk to

Information is power, and this is more so in the commercial world when the stakes are high. Knowing more about your supplier will increase the odds of obtaining a positive outcome for negotiations. Talk to the supplier representatives who are well-versed in the company’s finances, cash position and market position. Knowing key information like this will enable you to gain an upper hand in the negotiations.

Whilst it is tempting to just negotiate with your immediate point-of-contact from the supplier, it might not be the wisest option. Your point-of-contact might not have the power to make decisions or may not always be able to pass your message to the correct individual.

Instead, find out the person in charge of deciding payment terms and then reach out directly to him/her. The person to whom you should talk to may be one of the supplier’s higher echelon employees or even their CFO. They are likely to be in a better position to seriously consider your request.

3. Make Accepting Your Offer (sound like) a Win-Win Situation for Both Parties

It is important to avoid giving the impression that you are faced with cash management problems when negotiating. Always listen to the other side and understand what they want. This will enable you to offer them something which they want and therefore achieve a better outcome from your negotiation.

Give your suppliers some benefit in return for a longer payment term. Consider if you could increase your order volume from the supplier if your cash flow is freed up.

4. Be Realistic

Whilst it is important to aim high when you negotiate, always be realistic to avoid turning away your suppliers.

It is true that there are companies with payment terms as long as 90 days to 120 days. However, generally, these companies are massive with tons of suppliers competing to win their business. As a result of their strong bargaining power, they can pretty much demand any terms (at the expense of their suppliers).

Thus, consider the position of your business and determine if you are in a suitable position to demand for the payment term that you are asking for. If your payment term is at 30 days now, try to get 45 days or 60 days instead of 90 days.

In addition, being reasonable when negotiating also shows genuineness and sincerity in safeguarding the commercial interests of both parties. This is good in developing relationship with your supplier!

What if Nothing Works?

We understand that it is not easy to extend payment terms with your suppliers. It seems like a zero-sum game to businesses. Longer payment term for buyers results in better cash flow for the buyer. However, this comes at the cost of the suppliers’ cashflow. In view of this situation, CapitalBay offers invoice factoring program which proves to be one of the most efficient ways to create a win-win situation for both the suppliers and buyers.

Invoice Factoring

Invoice financing is one of the best options available to resolve your cash flow issue! With invoice factoring, you can pay your suppliers promptly without having to extend the payment term at the expense of the relationship with your supplier!

With CapitalBay’s invoice financing program, you don’t have to wait for payments from your customers anymore. You can receive up to ~80% on your outstanding invoices in advance.

Why should you go for invoice financing?

1. Require no upfront fee
2. Require no required collateral
3. Fast approval
4. Low financing cost
5. Flexibility to pick and choose whichever invoices you want to finance

Contact us now to learn more!

PWC recently published its 2019 Malaysia Working Capital Study: Optimising Working Capital for Growth. This is available for download on PWC’s website.

The article highlights some key findings from survey data, including:

• The Cash to Cash Cycle (C2C) days has gone from 50 days in 2014 to 54 days in 2018. PWC also found that this would be even higher if not for the inclusion of larger companies in the study. Small and medium sized companies reported further deterioration in their C2C days. Malaysia’s C2C days lag behind Singapore (46 days) , USA (31 days) and Europe (36 days). But is otherwise well-ranked amongst other ASEAN countries.
• The Days of Sales Outstanding (DSO), a measure of the number of days that a company takes to collect cash after the goods or services have been delivered, is currently (2018) 55 days.

Based on the surveys, PWC concluded that there is a cash release opportunity of RM133bn if companies were to optimize their working capital performance to the top quartile within their industries. Specifically, there are RM 30.7bn opportunity in receivables, RM 35.5bn opportunity in inventory, and a RM 67.1bn opportunity in payables.

PWC then recommends the use of Supply Chain Financing (SCF) as a way to unlock this opportunity. It identified five principle reasons for implementing SCF:

• Working capital optimization
• Liquidity needs of suppliers
• Supplier relationship improvement
• Improving our EBITDA / cost reduction
• Improve supply chain stability

In the report, PWC also featured us, CapitalBay, a Supply Chain Finance Platform as shown in the extract attached.

Download the full report ->

Want to unlock cash flow trapped in your supply chain?

Interested in implementing a SCF program?

Contact us now!

“The early days of the company were mostly about getting enough cash to get to the next month. Even as the company grew and grew it was always about having cash”

– Phil Knight, Founder of Nike

Excessive power of strong corporate customers pose a challenge to the competition policy in creating a fair system for the allocation of goods and services. The GLC Procurement Guidelines lay down the need to develop a stable and competitive supplier base. This may encourage buyers to negotiate terms that help promote long-term relationship with their suppliers. However, albeit the existence of such guidelines, the economy is dynamic and the law can only do so much. Large corporate buyers often utilize their stronger bargaining power to push for lower prices and longer payment terms, causing SMEs to suffer from chronic cash crunch.

How to Deal With Corporate Customers With Long Payment Terms?

1. Offer Early Payment Discounts and Other Incentives

Incentive offers such as free shipping or a small discount up to 10% can be a great motivator when customers are reluctant to agree on shorter credit terms. While it may not be a huge discount, it may be enough to get your customers’ attention. You can also try offering a tier-based discount : 10% discount if customer pays immediately after delivery; 5% discount if customer pays within 7 days after delivery; 3% discount if customer pays within 14 days after delivery.

2. Penalties for Late Payment

Next, the flip side of the above method would be charging more for late payments. However, bear in mind that this may in turn strain the relationship. We understand that it is very frustrating when 90 days credit term turns into 120 days or more. Thus, to avoid such situation, make it clear to your customer on how important their cooperation is to your business. Make them feel appreciated on how quickly and consistently they pay by dropping hints in your communication!

3. Ask for Partial Upfront Payment

Even if you end up having to accept long credit terms, try asking for a partial upfront payment (or a deposit). This may help you improve your business cash flow by securing a portion of payment before providing goods or  services. You can use this sum of money to cover the cost of providing goods or services (eg paying your suppliers or employees).

However, regardless of what steps you have taken to develop good credit terms, minimise your credit risks and to improve your cash flow, there is still a chance you will be affected by a late payment or bad debt during your business operations.

Solution: Invoice Financing

A great way of minimising the effect of late payments on your business and preparing for any such eventualities is to use an invoice financing platform such as CapitalBay to turn your credit sales into cash sales, by selling them at a small discount.

Here are some of the key highlights of CapitalBay’s invoice financing program:

• No upfront fee.
• No collateral required.
• Approval as fast as 3 days.
• Cost of financing as low as 0.7% per month.

Always be prepared for rainy days and check out our invoice financing program now.