Negotiating Payment Terms

Sadie Keljikian, Express Trade Capital

As a wholesaler, negotiating payment terms with your retail customers can be complex and lead to friction. Fortunately, most retailers are reasonable and will work with their vendors to find a compromise. Furthermore, there are ways to work around an insistent customer who refuses to yield to their vendors’ needs.

Where do I begin?

Depending on the customer, a variety of factors can affect the agreed payment terms. First and foremost, it’s important to understand the power you have as a wholesaler and the power your customer has as a retailer. Since retailers are the customers in this arrangement, they usually get the most consideration. Big-box retailers are particularly aware of how much value they hold as customers, since they typically have good credit and place the largest orders their vendors receive. Thus, large scale retailers often seek the best, or longest, payment terms (N90 or more), since most of their vendors are willing to accommodate them.

As a wholesaler, you too have power in the equation, particularly if your product sells well. The more unique and/or popular your product, the more retailers will want it in their stores and thus the more willing they will be to meet your needs.

It is important to bear in mind that, although payment terms are negotiated at the onset of the wholesaler-retailer relationship, larger scale retailers usually don’t use long-term contracts. Instead, individual purchase orders serve as contracts.

What if my customer or I need to adjust terms?

Typically, if either a customer or a wholesaler needs to alter the agreed upon payment terms, it prompts another round of negotiations. If a long-term contract is in place, unilateral adjustments of payment terms are legally prohibited and can result in a lawsuit, so a new agreement must be reached between the two parties.

Sometimes, big retailers (who, as mentioned, typically do not enter long-term contracts with their vendors) will change their policy and formally announce that all future purchase orders will be under new payment terms. If you find yourself unable to agree to those terms due to cash flow concerns, you have a few options.

What are my options when my customer wants better payment terms than I can reasonably offer?

• Negotiate again. – Although big retailers typically prioritize their own business interests, they will sometimes make exceptions for valued vendors. This is where your worth and power as a vendor comes in, because if your customers care enough about keeping your products in their stores, they may be willing to come to an agreement.
• Turn down the order. – If your customer is asking too much and won’t negotiate to meet your needs, you can always turn down that customer’s purchase orders. This may hurt your revenues, since the customers who typically ask for extensive payment terms are the ones who will place consistent, large orders. But again, if you aren’t under a long-term contract, you are under no obligation to fulfill every purchase order.
• Factor your receivables. – If you can’t wait as long for payment as your customers want you to, but don’t want to lose business, you can factor your receivables. In a factoring agreement, a lender will advance you most of the value of your fulfilled invoices, then collect on the invoices from your customers. In other words, in exchange for a small percentage of your invoice values, you will receive payment immediately and no longer need to worry about collecting from your customers.
• Finance the purchase orders. – purchase order financing, or “PO funding.” PO funding is an arrangement whereby a financial institution pays manufacturing and shipping costs for wholesalers against confirmed purchase orders. It’s a nearly perfect system for situations like this, since the customers with the most leverage (i.e. the ones that request better payment terms) are usually credit worthy.

Although the lack of an overarching agreement can make payment terms seem a bit murky, the longer your relationship with your customers and the more customers you have, the more you will be able to gain leverage and do business the way you want to. Know your rights and options and you will be prepared to manage any customer, regardless of their preferred terms.

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