Picture this: It’s Friday afternoon and you have $8,000 in the bank with a $15,000 payment due to a vendor on Monday. You’re expecting a client payment to come through, but it doesn’t. Your first instinct might be to panic or to ignore the situation altogether and leave the vendor wondering where their money is.
But there’s a better way.
The good news is that vendors likely want to work with you. Many would prefer to negotiate or modify the repayment terms rather than attempt to chase down your unpaid invoices. Following this three-step negotiation process will allow you to communicate with the vendor to find a mutually beneficial solution.
Your three-step negotiation process
Preparing your position, planning the conversation beforehand, and sealing the deal while maintaining trust can preserve the relationship and keep your business operating smoothly.
Step 1: Analyze your cash flow before a crisis
Rather than waiting until Friday afternoon to see if you have enough to cover Monday’s expenses, you should always be looking ahead at your cash flow to prevent a payment crisis. Do regular check-ins to look at when money is coming in and going out to make sure you’re paying on an optimal schedule. For some businesses, paying vendors immediately works, but for others, it may make more sense to pay according to longer terms to have more money to work with throughout the month.
Before you approach your vendor, gather your payment history with specifics about orders and past payments. You should also look at your cash flow projections and create a specific proposal with amounts and the dates you’ll make your payments.
Step 2: Create a conversation script
Now that you’ve analyzed your cash flow and determined the best way to move forward, it’s time to create a conversation script to work off of when you speak with the vendor. This can be a challenging conversation, so preparing ahead of time will increase your confidence as you approach the discussion.
Structure your conversation to flow along these lines:
- Acknowledge the terms. Let the vendor know that you understand the current terms. This is also a good place to emphasize your relationship. If you’ve been a great customer for 10 years, make sure to mention that.
- Present an alternative. Explain that renegotiating the terms can help you maintain a strong partnership, and present an alternative to the current terms. Maybe you’ve grown and need to move from a 15-day term to a 30-day term.
- Offer an exchange. If extending the payment term will allow you to make full payment and increase your orders later, include that. You can also offer testimonials or referrals.
- Explain the timeline. Communicating the timeline can ease the vendor’s mind because they’ll know that the payment is coming even if it’s not on the schedule they originally expected.
Here’s an example script to get you started:
Hi [Vendor]. I’m contacting you to discuss our payment terms. I understand that the agreed upon terms are [insert terms]. We’re in the midst of a cash flow adjustment and wanted to propose a modification that will allow us to ensure full payment and maintain consistent orders.
Step 3: Seal the deal and maintain trust
Once you’ve discussed the modified terms with the vendor, make sure to get the agreement in writing. To maintain trust, you need to stick to the new terms religiously, so ensure they’re doable before you agree to them. Finally, communicate proactively with any updates, so the vendor isn’t left wondering about anything.
Know how to set up negotiations
As you prepare to negotiate, think about the following three negotiation tactics and be sure to avoid the red flags that could set vendors up to turn down your proposal.
Frame it as partnership
Come to these negotiations as a partner offering terms that allow you and the vendor to succeed. Don’t lead with desperation or a plea for help. As you make your plan, analyze future revenue and really look at how new terms could benefit you and the vendor.
Offer value in exchange
Offer value in exchange for the renegotiated terms. This could include sharing a testimonial about the vendor or referring business to them. Or you could agree to be part of a case study that would market their business. Another way to offer value is to look to the future. For example, if your projects show that you can increase orders by 25% with extended terms, include that in the discussion.
Give options, not ultimatums
Prepare two or three specific proposals for the vendor to choose from. They may go with the first option you present, but if they hesitate, you’ll be prepared rather than having to figure out another option on the spot. Options can include extending the payment term to 15 or 30 days, paying part of the invoice now and the rest later, or committing to larger orders down the road.
Know when NOT to negotiate
There are a few situations in which you shouldn’t initiate negotiations. If you’re already behind on payments or can’t commit to the proposed terms, then the best course of action is to pay partial amounts as quickly as you can. You should also present a specific payment plan to the vendor and address the root cause of the cash flow issues on your end.
Get proactive: Take these steps to stay ahead of cash flow issues
Realizing that you don’t have the cash flow to cover expenses and need to negotiate repayment terms with a vendor can feel stressful, but you may have more options than you think. Before you approach the vendor or enter into negotiations, remember that vendors want you to succeed. When you succeed, they get paid. Rather than sinking into desperation, reframe your situation as engaging in strategic cash flow management to better your business.
If cash flow is an issue, and you need to negotiate or modify repayment terms with your vendors, follow these steps, starting this week:
- Review current vendor payment terms
- Identify top 3 critical vendors
- Prepare a 2-3 specific proposals for each
- Schedule proactive conversations
To get started, you can check out Grow America’s cash flow forecasting guide. This guide will walk you through how to take stock of your business’s current position and create a cash flow forecast so you can stay on track throughout the year.
We’re always in your corner as you strategically negotiate with your vendors to make your payments and improve your cash flow.