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