Negotiating payment terms is one of the most effective ways to improve a company's cash flow without additional financing. By shortening client payment periods from 30 to 14 days, you free up an average of two weeks' worth of turnover in working capital. Conversely, by extending supplier payment terms, you gain more time to fund operations from cash flow.
The impact of payment terms on cash flow
The impact of payment terms on cash flow is easy to underestimate. If your monthly invoicing is EUR 200,000 and the payment term is 30 days, you continuously have approximately EUR 200,000 tied up in receivables. If you manage to shorten the payment term to 14 days, capital tied in receivables drops to approximately EUR 93,000 – you free up over EUR 100,000 in working capital.
Example: EUR 200,000/month invoicing. Shortening the payment term from 30 to 14 days frees up approximately EUR 107,000 in working capital. Similarly, extending supplier payment terms from 14 to 30 days on EUR 100,000/month purchases frees up approximately EUR 53,000. A total of over EUR 160,000 – without a single euro of additional financing.
Negotiating with clients – shorter payment terms
Shortening payment terms with clients requires a tactful approach. Few clients agree to a shorter payment term without something in return. This is a trade negotiation where both parties gain something.
Negotiation tactics
Effective negotiation tactics with clients:
- Cash discount: offer a 1–2% discount if the client pays within 10 days instead of 30
- Delivery priority: faster payers receive priority in delivery order or stock availability
- Contract renewal: tie the payment term change naturally to a contract renewal
- Gradual change: first suggest 21 days instead of 30 – a smaller change is more easily accepted
- Value-based justification: explain how faster payment enables better service and pricing
When it makes sense to accept a long payment term
Shortening payment terms is not always the best strategy. If the client is large and strategically important, accepting a long payment term can be the sound business choice – provided you manage cash flow through other means.
Invoice financing is an excellent tool for this. You can offer the client a 60-day payment term and still receive your money within 24 hours through invoice financing. The financing cost is often less than the risk of losing an important client.
Negotiating with suppliers – longer payment terms
Extending supplier payment terms is the other side of payment term negotiation. The longer you can use the supplier's money before paying, the less working capital you need.
Supplier negotiation strategies:
- Volume commitment: a larger purchase volume in exchange for a longer payment term
- Long-term contract: committing to a 1–2 year contract provides negotiating power
- Payment method: a promise of regular and on-time payment is valuable to the supplier
- Market comparison: competitive tendering is a normal business practice – use it as a negotiation lever
- Timing: negotiate during the supplier's quiet season when they are more flexible
Finnish B2B payment term standards
In Finland, standard B2B payment terms are typically 14, 21, or 30 days net. In international trade, 30–60 day terms are commonly used. The EU Late Payment Directive limits business-to-business payment terms to a maximum of 60 days unless explicitly agreed otherwise and the term is not unreasonable.
Most common payment term formats:
- Net 14/21/30: The full amount payable within 14/21/30 days – the simplest term
- 2/10 net 30: 2% cash discount if paid within 10 days, otherwise 30 days net
- Advance payment: Part or the full amount before delivery – reduces the seller's risk
- Instalment payment: Agreed payments according to project progress – common in project-based business
- Monthly account: All purchases in a month on a single invoice – common in ongoing client relationships
Cash discount vs. invoice financing – which is better?
Offering a cash discount and using invoice financing are both ways to accelerate cash flow, but their costs differ significantly. Always compare both options before making a decision.
A 2/10 net 30 cash discount corresponds to approximately 36% annual interest – the discount is small but offered on every invoice regardless of need. Invoice financing costs typically 1–3% per invoice and is used only when needed. In most cases, invoice financing is the more cost-effective option overall.
The EU Late Payment Directive and its reform
The EU Late Payment Directive protects SMEs in particular against unreasonable payment terms. The current Directive limits payment terms to 60 days between businesses and 30 days in the public sector. The Directive is being revised to become even stricter, which will benefit small suppliers.
The Directive also guarantees an automatic right to late payment interest and a EUR 40 recovery cost without a separate claim. Many Finnish SMEs do not exercise these rights out of fear of losing the client relationship – but mentioning late payment interest in the contract and on the invoice serves as an effective preventive measure.
Summary: the impact of payment term optimisation
Negotiating payment terms is a fundamental cash flow management tool that requires no financing costs. Shorter client terms and longer supplier terms free up working capital that you can use for growth, investments, or building a cash buffer. When you combine negotiated payment terms with invoice financing, you have a flexible toolkit that keeps cash flow under control in every situation.
