Supplier Payment Terms: How Extending From 7 Days to 30 Days Frees SGD 100K in Working Capital

How payment terms affect working capital#

You have SGD 500K per month in supplier purchases. If you pay net 7 (7 days after invoice), your average balance payable to suppliers at any time is 7 days of purchases = SGD 116K. If you pay net 30, your average payable is 30 days = SGD 496K. The difference (23 days) is freed working capital of SGD 380K. This is not cost-free — the supplier is effectively financing you by 23 days. The implied cost is the interest rate the supplier could have earned by being paid earlier, typically 8-15% annually on that amount. However, from your perspective, the financial benefit of net 30 vs net 7 is SGD 38K annually in reduced financing cost (10% cost of capital on SGD 380K). Most suppliers accept net 30 as a standard term for established customers.

Standard payment terms and what they mean#

Net 7: payment due 7 days after invoice date. Net 15: payment due 15 days after invoice date. Net 30: payment due 30 days after invoice date. Net 45/60: less common, requires special negotiation. 2/10 Net 30: 2% discount if paid within 10 days, otherwise payment due at 30 days (rarely used in SMB supplier relationships). COD (cash on delivery) or prepayment: payment due before or upon delivery, highest risk for buyer, typically only for untrusted suppliers.

Negotiating better payment terms#

Payment terms are negotiable with most suppliers. Approach: 'Our standard terms are net 30. Can you accommodate this for our account?' Many suppliers will agree, especially if you are a good customer (reliable, pays accurately, reasonable order size). If supplier resistance is strong, propose: 'Can we start at net 15 and move to net 30 after 6 months of good payment history?' Most suppliers will agree to a phased approach. For large orders or high-value relationships, you can be explicit: 'I am comparing you with [competitor]. They offered net 30. Can you match that to win our business?'

Trade-offs in payment terms negotiation#

Extended payment terms may come with trade-offs: early payment discounts (2/10 Net 30 means you save 2% if you pay in 10 days instead of 30), price increases (to compensate supplier for financing), or volume commitments (supplier requires minimum order quantity or minimum annual spend). Evaluate whether the trade-offs are worth it: if a supplier offers 2% discount for early payment on a 30% gross margin product, the discount is worth 7% of gross margin — quite valuable. If you don't have cash shortage, paying in 10 days to earn 2% is a 72% annual return (2% per 20 days).

AskBiz Payment Terms Optimizer#

AskBiz analyses your supplier payment terms across all relationships, calculates the working capital impact of each, and identifies opportunities to extend terms. It shows which suppliers have net 7 or net 15 terms and quantifies the working capital you could free by negotiating to net 30. Ask it: what is the total working capital freed if I move all suppliers to net 30, which suppliers have the most favorable terms, show me suppliers where I can negotiate better terms based on my payment history.

• Extending payment terms from net 7 to net 30 increases your average accounts payable by 23 days.
• For a business with SGD 500K monthly supplier spend, 23 extra days of float is SGD 382K in freed working capital — equivalent to SGD 38K annual financial benefit.