Why Do Most Customers Ask for Longer Payment Terms?
In sales negotiations, one of the most common requests from customers is for longer payment terms. During my discussion with Thomas Lundström, Founder of CapAid, he explained why this happens and how it affects both companies and individuals.
"There are two main reasons, and it depends on whether you’re looking at the company level or the personal level.
At the company level, businesses see longer payment terms as free money. They’re essentially getting a loan without paying interest, which reduces their need for external financing. It saves them money, which is why they keep pushing for longer payment terms. If they get 30 days, they’ll ask for 40 next year, and then 50, 60, 90, 120, and eventually, even 180 days or more. It never stops because, for most companies, this is free money. It’s understandable why they want it.
On the personal level, the person purchasing is often just following orders. Their boss says, 'We need at least 60 days,' and they have to ask for it. It’s not about personal benefit—they don’t get bonuses or any rewards for securing better payment terms. They’re simply doing what the policy tells them to do.
Now, are these requests reasonable? They can be, but it depends on the context. For instance, it’s not reasonable for a company like Kesko to ask a small startup selling juice for 180 days. That’s not good for the whole supply chain, as it could push the small supplier toward bankruptcy. However, smaller companies find it difficult to push back because larger companies can easily say, 'If you don’t give us these terms, we’ll buy from someone else.' Big companies often force smaller ones to accept unreasonable terms.
For the company offering longer payment terms, it’s not always a risk. If they have strong financials, good margins, and cash flow, they can manage it. But in the long term, it can become risky. Let’s say you’re giving 180 days when your sales are a million. That might work. But what happens when you’re selling 100 million? You’ll have a lot more capital tied up, which could hinder your ability to grow. You might not have the financing to support that growth.
For the customer demanding long payment terms, if they’re buying something they can get anywhere, the risk isn’t as big. If their supplier can’t continue selling to them, they can find someone else. But if the supplier provides something critical to the customer’s business, their bankruptcy will pose a big risk to the customer’s supply chain."
In summary, longer payment terms can save customers’ money, but they pose significant risks to suppliers, particularly smaller businesses. Negotiating fair terms is crucial to maintaining a healthy supply chain and avoiding financial strain.
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Thomas Lundström
Founder & Chair of the Board, CapAid
Thomas is the founder and driving force behind CapAid. He holds a Master's degree in Economics from Hanken School of Economics in Helsinki and is passionate about value creation and helping others succeed.
He has over 30 years of experience in financial consulting, including areas such as working capital management, corporate financial risk management, and financial steering.