Scoring a new contract or purchase order from a reliable customer can provide any contractor or supplier with a windfall growth opportunity. Still, the nature of the opportunity can also present many growing businesses with a dilemma.

Credit-worthy companies know that plenty of suppliers and other contract firms covet doing business with them.  Accordingly, they possess enough leverage to require generous payment terms that may leave their partners waiting for 60 to 90 days, or even longer, for payment.

Without an immediate payment, small businesses may lack the cash flow they need to pay vendors and employees to deliver on the contract.  In today’s world, where there are very few customers, and everything is consolidated, businesses do not have the luxury of turning a customer down.  If a company is not properly managing its cash flow, it might have to pass on the opportunity and risk never being offered it again. 

Learn more about current payment term trends and some tips to help manage cash flow in this environment.

Payment Terms Are Trending Longer

More businesses have turned to longer payment terms as a way to manage their own cash flow. As one example, The Star Tribune reported that 3M notified some suppliers that they needed to extend their payment terms from net 60 to net 90 to help manage their working capital.

Supply-chain professionals and economists have observed that 3M provides just one example of a growing trend towards extending contract payment schedules. For other examples, Best Buy and Honeywell also asked suppliers to extend payment terms within the last year.

Besides longer payment times, other causes have contributed to later payments. As an example, pandemic-related manufacturing slowdowns and supply issues have also generated long lead times. In turn, longer turnaround times will mean waiting even longer for payments.

Tips to Manage Cash Flow Challenges

Waiting months for payment poses a challenge for many businesses, including manufacturers, suppliers, staffing companies, transportation businesses, construction trades, and even professional service firms. While changing terms might help some businesses manage their own working capital better, it obviously hampers their partner company’s ability to do the same.

Cash Flow Management Strategies

Dealing with cash flow ensures businesses have the money they need to pay their suppliers and employees. Some important tactics for managing cash flow include:

• Understanding the impact of payment terms: For various reasons, businesses should understand and accept the consequences of varying payment terms. With other things equal, shorter payment terms offer more value than longer ones because delayed payments might generate more costs in the form of interest, fees, or lost opportunities.
• Offering incentives for early payers: With the understanding that shorter payment terms hold value, some businesses offer incentives for early or cash payments. Offering a discount or other incentive for early payments may save money in the long run. Adding electronic payment can make paying more convenient and help speed things up.

Invoice Factoring

New, small, or struggling businesses may lack the credit or the time to apply for traditional business loans.  Rather than turn away opportunities for growth because of a simple lack of cash or credit, small businesses should consider alternative funding options that bridge the gap between agreements and payment dates.  As a simple, fast, and reliable alternative, consider the benefits of invoice factoring as a funding solution.  

Unlike most kinds of traditional business financing, invoice factoring does not involve a loan. When an invoice is factored, the business will transfer ownership of their invoices for accepted and completed work in exchange for an agreed-upon advance, as a percentage of the invoice. 

This kind of funding gives companies the cash flow they need to focus on their current operations and relieves concerns over slow-paying customers.

Businesses with these kinds of characteristics may benefit from invoice factoring:

• Qualified unpaid invoices for completed delivery of goods and services
• Creditworthy B2B or B2G customers
• Long delays between completed work and payment; trade cycle 60-150 days or more
• Losing sales or missing growth opportunities 
• Immediate growth opportunity with a product, customer, project, or market share

Don’t Let Long Payment Terms Derail Business Growth

In the worst cases, extended payment terms can force companies to turn down work. In some cases, demonstrating that cash flow management has caused problems might even damage their business reputations and ability to conduct business in the future. In all cases, it wastes time and money that the company used to generate a sale.

Access to rapid, flexible funding not only helps companies grow but can even help them save money. Many of the business’ own suppliers and vendors will offer discounts for prompt, cash payments that the business owner will be able to take advantage of. Moreover, companies don’t need to have established credit scores or wait for months for approval.

To discuss the best funding solution for your business, contact Capstone at (212) 755-3636 or complete a short, online application.