Extended maturity is a strategy buyers use that takes advantage of invoice payments over a longer period than usual, which can sometimes exceed 30 days or more. As is well known payment terms are part of a complex financial strategy built to maximize company performance.
Generally almost all companies are interested in increasing their working capital. One popular method of doing this is through a re-evaluation of the supplier’s payment terms. The practice may be less beneficial to the suppliers involved, depending on how the process is carried out. Extending the payment term essentially stops the payment. What is good for the buyer may be bad for the seller. On the other hand, what is bad for the seller can damage the relationship between the supplier and you.
Successfully extending the payment term requires careful consideration. The process is not as simple as demanding that the supplier receive payment 30, 60, or even 90 days later than agreed. Companies that extend this requirement without a good strategy are often surprised when it is not approved and can even damage the cooperative relationship that has been established.
Value of extended payment terms
Extending supplier payment terms is the best way to increase working capital. Companies with more cash can allocate their money to priority projects quickly, spurring innovation to stay ahead of competitors. These are all specific outcomes, of a strategy whose payouts are extended to the goal of increasing working capital.
Cooperating with partners
Extending a payment term or a payment due is not easy, so make sure the supplier understands the reasons for requesting an extended payment period. You should avoid creating supply chain risk in favor of better cash flow. Work with suppliers to better understand their cost cycles, and work in good faith to align extended payment terms. This will certainly help ensure a longer payment term while maintaining a good relationship.
The advantage of supply chain financing
Extending the payment term offers the one-sided benefit of allowing the buyer to take advantage (holding money longer), in which case the seller must be at a disadvantage (face a cash flow crisis on their part). However, there are options that offer the best benefits for both parties.
Supply Chain Financing forms a third party between buyers and sellers. Once the invoice is fulfilled and payment is due, this third party pays the supplier and not the buyer. In turn, the buyer will pay the third party at a later date. The introduction of this third party adds flexibility to the company’s relationship in order to extend the payment term temporarily and at the same time reduce the amount of time it takes a supplier to get paid. Ultimately, this means more liquidity for buyers and suppliers.
Knowing your payment landscape
Many organizations have multiple levels of procurement that it is not uncommon to see that payment terms vary widely within spending categories, or even with a single vendor. Therefore, conducting a spending analysis by taking into account the terms of payment is something that must be understood in applying for an extension of the payment due.
Extending the payment due date can be a boon to a company’s cash flow if done the right way. Whether using supply chain financing partners or negotiating directly with suppliers, what needs to be considered is that companies must ensure that a strategy has long-term viability that involves established cooperative relationships.