A few years ago, Whirlpool Corp. made a push to get extended payment terms from its vendor base. Know their business and how you fit in. Extended payment terms can be a huge burden for buyers and suppliers. Pushing out supplier terms while keeping customer terms short gives firms free cash for other projects. Why are extended payment terms preferred over standard payment terms and how to account for these differences when evaluating suppliers will be reviewed and shared in this entry. Extending Payment Terms. But it can also increase the financial stress on suppliers and ultimately lead to … It should be written in formal business-letter style and either included with any required forms or sent by certified mail with a return requested. Several supply chain methods can be used to extend the time of actual payment: Invoice terms. Remember that. Instead of the prevailing 60-day terms, the Michigan-based appliance maker wanted to pay its suppliers in 90 days. Extending payment terms to 120 days or more frees up working capital for big companies. Why big companies extend payment terms to suppliers. You do have some leverage to bring to the negotiating table. The borrower should make sure it is addressed to the right person. Your vendors want to be paid as quickly as possible, while you want to extend the time of payment for as long as possible. Your customer wants longer payment terms, but they also probably don’t want to lose your products. The customer chose your product or service because they could see value in it. In other words, this is how much of the order value you will pay at various points of time throughout the production process. In response to the financial recession of 2008, many supply chain and procurement departments began pushing their suppliers for extended payment terms as a means to improve cash flow and limit the need to acquire credit, which was in short supply. There may be short term benefits for extending payment terms, but in the long term, it may not be sustainable for your business or your suppliers. The benefits of such an arrangement to Whirlpool are obvious, as is the pain it could cause to many in its supply chain. how quickly payment is to be received). Payment terms are the designated amounts of money you pay the supplier at various points in time. Establish Favorable Terms: In terms of cash flow, you and your vendors have conflicting goals. Customers may specify their debtor days in the contract as a stated policy (i.e. What commitments can I give you in return? So before terms are extended, you’ll first need full control over the timings of payments, as well as the ability to approve invoices rapidly. But what would make the “pain” of extended payment terms easier? We need to extend terms with our suppliers. If we were able to offer an effective invoice discounting program funded by partners, would that help? To be able to answer these questions and properly evaluate the above suppliers we need to understand our company’s cost of capital. When a firm uses trade credit, it is deferring payment to its suppliers as a means of better managing short-term cash flows. They can call the lending institution to find out the name of the recipient. Published on May 18, 2015 May 18, 2015 • 31 Likes • 3 Comments They don’t want to find a new supplier. Not to mention the negative press. This process begins from when a purchase order is placed, through production, to delivery. It stinks. But there is a solution at hand. Extending payment terms to 60 days is unlikely to go down well with suppliers if they are then consistently paid later than 60 days. Payment terms is an issue that affects your balance sheets, your reputation, and your supply chain. Below is a sample letter for extension of payment terms.