Responding to customer demands for extended payment terms

Sometimes customer will insist on payment terms beyond the normal net 30 days — say, net 45 days plus a 90-day cure period before the vendor can terminate for nonpayment. If the vendor were to agree, the customer would get the benefit of several weeks’ extra float on its money. Jason Anderman raises this issue at WhichDraft.com; here’s an edited version of what I responded at his site:

The vendor may be seeing the effect of tag-team negotiation from different departments within the customer’s organization. The customer’s finance department may have issued an edict that the accounts-payable process will only make payments on the extended terms unless an exception is approved by Finance.

If that’s the case, the actual buyers can go to the vendor and claim, possibly disingenuously, that “we’d be willing to agree to net 30 days, but we’d have to ask for approval from Finance. That would delay closing our deal, probably into next quarter. On the other hand, if you can live with the extended payment terms, we can get it done this quarter.”

The sales person might well need for the sale to close this quarter, to help him make his numbers and get the commission (after all, he has to pay for the vacation he promised his wife). So he naturally will urge the vendor’s contract negotiator to simply agree to the customer’s proposal for extended payment terms instead of delaying the deal.

There are a couple of possible come-backs that the vendor can try with the customer:

1. “We’d be OK with letting you have the extra float, but we’d need you to agree to pay interest at prime + X after 45 days.” The buyer’s response, of course, will be that this too would have to be approved by Finance, which by hypothesis is something to be avoided if possible.

2. It might be possible to steer the conversation into a discussion about pricing. The vendor’s negotiator could responsd along the following lines: “The pricing we offered was premised on payment net 30 days. We’d be willing to let you have the additional float, but we’d need to increase the purchase pricing — we have to take into account our increased financial risk and the time value of money.” The customer’s actual buyers can then decide whether they’d rather spend the extra money or go to Finance for approval of net 30 days. (My experience is that buyers would often rather give up the extra float than pay more on the front end.)

The weakness in either of these responses, of course, is that when the shot clock is running down at the end of the quarter, some sales people can be so eager (read: desperate) to close business that they won’t hold their ground — this kind of sales person wants everyone else in the vendor’s organization to make concessions so they can get their commissions.