Supporting Extended Payment Terms: Techniques to Protect Your Cashflow
Content
One of the most common challenges credit directors face is the growing demand from customers for extended payment terms. Across many industries, the trend is towards longer settlement periods — a trend that has a direct impact on sellers’ incoming cash.
It is not difficult to see why buyers push for more time to pay. Every additional day of Days Payable Outstanding (DPO), sometimes referred to as ‘creditor days’, frees up working capital that these businesses can redeploy more profitably. In effect, buyers are using their suppliers’ balance sheets to fund their own growth and improve liquidity.
For sellers, payment terms can be the deciding factor in winning or losing business. The task is to balance the cashflow and risk impact of increased Days Sales Outstanding (DSO), often called ‘debtor days’, against the potential to attract more customers and secure larger contracts.
This article examines strategies to help your business manage this balance effectively.
Why Customers Push for Longer Terms
Post-pandemic recovery, ongoing supply chain disruption, and economic uncertainty mean financial leaders place a premium on liquidity. SMEs are particularly vulnerable to shocks and will naturally prioritise cash reserves. Extending DPO is one way for buyers to protect themselves against volatility. In some cases, it is less a choice than a necessity, driven by delays or tightened credit further up the chain.
The Impact of Extended Payment Terms on Cashflow
Extending payment terms to buyers inevitably strains liquidity. If receipts are delayed, it becomes more difficult to meet ongoing obligations, from payroll and stock replenishment to utilities and other operating costs. Effective cashflow management is vital for suppliers to sustain operations and invest in growth.
Late payments are already a significant issue for UK businesses. Allowing longer terms on top of this can amplify the pressure. The question becomes: how can you support customers’ needs without undermining your own financial resilience?
Encouraging Early Payments
One solution is to counter extended terms with incentives for early settlement, such as prompt-payment discounts. Negotiating payment terms at the outset of a customer relationship allows scope to preserve revenue while encouraging timely payment.
Practical measures also help:
- Streamlined invoicing: Send invoices promptly and accurately, preferably electronically.
- Ease of payment: Provide digital payment options such as debit or credit card links directly from the invoice.
- Automated reminders: Track invoice open and click rates, and issue automatic follow-ups ahead of the due date.
- Integration with AP portals: Many large buyers require suppliers to upload invoices into their accounts payable portals. While this can be resource-intensive, technology now exists to automate this process and reduce manual error.
Maintaining Cashflow with Longer Payment Terms
Here lies the heart of the issue: how to meet customers’ demands for longer terms without damaging your own liquidity. Two primary tools are available:
Invoice Finance: Invoice financing allows businesses to sell invoices to a third-party finance provider (the factor) in exchange for immediate cash. The factor then assumes responsibility for collecting payment directly from your customer.
The advantage is clear: you unlock cash as soon as invoices are raised, neutralising the effect of extended terms. If the arrangement is recourse factoring, you gain the additional advantage of having your company’s accounts receivable managed at no additional cost, but may need to repay the factor if a debtor defaults. Bad debt protection mitigates this risk, but comes at an additional cost.
Early Payment Discounts: Another option is to incentivise buyers to pay faster by offering a discount for early settlement. A typical example might be “2/10, net 60”: a 2% discount if payment is made within 10 days rather than the full 60. This reduces DSO, strengthens cashflow, and can lower bad debt risk.
Example Scenario
Take the case of a mid-sized UK engineering firm, ABC Precision Ltd, supplying custom equipment to multiple industries. Several key clients request 60- to 90-day payment terms to manage their own cash positions.
ABC Precision responds with a dual strategy:
- Early Payment Discounts: A 2% reduction is offered for payments within 15 days, encouraging some customers to settle earlier.
- Invoice financing: For clients who insist on longer terms, ABC Precision sells the invoices to a factor under a non-recourse agreement, ensuring they receive cash immediately without the risk of having to repay the factor if the customer defaults.
This blended approach allows ABC Precision to accommodate clients’ requirements, safeguard its liquidity, and continue fulfilling large contracts without strain.
Conclusion
Extended payment terms are now a fact of life in many sectors. For suppliers, the key is not to resist them outright, but to adopt strategies that protect liquidity while maintaining strong customer relationships.
By combining clear policies, efficient invoicing, incentives for prompt settlement, and financial tools such as invoice financing, UK businesses can support buyers’ cashflow needs without jeopardising their own. The goal is to strike a balance: keeping customers satisfied while safeguarding your financial stability and enabling long-term growth.
Contact us to optimize cashflow and accelerate access to working capital while providing extended payment terms to your customers.
Key Takeaways
- Customers’ demand for extended payment terms is growing across many industries.
- Late payments are already a significant issue for UK SME businesses. Allowing longer payment terms amplifies the pressure and undermines suppliers’ financial resilience.
- By combining clear policies, efficient invoicing, incentives for prompt settlement, and financial tools such as invoice financing, UK businesses can support buyers’ cashflow needs without jeopardising their own.
eCapital UK
eCapital Commercial Finance (eCapital) is a leading invoice financier providing funding facilities up to £4m to support the growth of SMEs through the provision of flexible working capital facilities. With five fully functional UK regional offices, its local teams are uniquely placed to respond promptly and purposefully to the cashflow needs of its clients. The business has grown significantly since its launch in 2001, providing over £12 billion of funding to businesses. It is majority owned by eCapital, a US based financial services business with interests in the USA and Canada.
