Did you know? Payment terms can directly impact your cash flow and working capital. For eCommerce businesses, understanding and optimizing these terms is essential to staying financially flexible and competitive.
Here’s what you’ll learn in this article:
- Why Payment Terms Matter: Longer payment terms can improve cash flow by delaying outflows, while shorter terms strengthen supplier relationships.
- Cash Conversion Cycle (CCC): Learn how payment terms influence the time it takes for your cash to return after purchasing, selling, and collecting payments.
- Strategies to Optimize Terms:
- Align payment terms with sales cycles.
- Negotiate early payment discounts or extended terms.
- Consider alternative structures like dynamic discounting or hybrid models.
- Financing Solutions: Discover how revenue-based financing can bridge cash flow gaps without straining supplier relationships.
Quick Tip: Align supplier payments with your sales cycles to improve liquidity. For example, if customers pay in 14 days but suppliers require payment in 30 days, you gain a natural cash flow advantage.
Read on for actionable steps to improve your working capital and strengthen supplier partnerships.
How Supplier Payment Terms Affect eCommerce Working Capital
What Are Supplier Payment Terms
Supplier payment terms outline when and how your eCommerce business is expected to pay its suppliers. These agreements cover key details like payment deadlines and methods, forming the backbone of effective cash flow management.
In eCommerce, the most common terms include Net 30 (payment due in 30 days), Net 60 (payment due in 60 days), and Net 90 (payment due in 90 days). Some suppliers also provide early payment discounts. For example, a term like 2/10 Net 30 means you can enjoy a 2% discount if you pay within 10 days, but otherwise, the full amount is due in 30 days.
These terms are more than just deadlines - they're critical tools for managing inventory cycles and seasonal sales fluctuations. By postponing cash outflows, they act as a form of interest-free financing for your business.
However, many companies struggle to stay on top of payment management. Research shows that one in twelve businesses fail to monitor payments effectively. This can lead to costly consequences. In North America, for instance, 55% of B2B invoices are overdue, and about 9% are ultimately written off.
The key is finding the right balance. Negotiating favorable terms can improve your cash flow and reduce reliance on loans or overdrafts. But pushing for overly extended terms could harm supplier relationships, potentially causing delays. Up next, we’ll explore how these terms tie into your cash conversion cycle.
Payment Terms and Cash Conversion Cycles
The cash conversion cycle (CCC) tracks how long it takes for the money you invest in inventory to return to you after completing the process of purchasing, selling, and collecting payments. Robert Liebisch, Founder of Cashflow is King, explains it well:
"The cash conversion cycle measures how quickly invested cash returns after purchasing, selling, and collecting payments. The speed at which capital returns is crucial."
The CCC consists of three main components, all of which are influenced by supplier payment terms:
- Inventory Days: How long you hold inventory before selling it.
- Receivable Days: The time it takes for customers to pay after making a purchase.
- Payable Days: The time you take to pay suppliers for goods or services.
Supplier payment terms specifically impact the Payable Days portion. Extending payment terms increases your Days Payable Outstanding (DPO), allowing you to hold onto cash longer and improve your overall cash conversion cycle.
For context, the median cash conversion cycle falls between 30 and 45 days. Some eCommerce businesses achieve a negative cash conversion cycle by receiving customer payments before paying suppliers, which can provide a significant edge in managing working capital.
The table below breaks down how different payment strategies affect cash flow and operational flexibility:
| Payment Term Strategy | Cash Flow Impact | Operational Flexibility Impact |
|---|---|---|
| Longer Payment Terms | Improves liquidity | May strain supplier relationships, leading to potential delays |
| Shorter Payment Terms | Reduces liquidity | Strengthens supplier relationships and improves prioritization |
| Early Payment Discounts | Lowers cost of goods sold, boosting profitability | Requires efficient payment systems to take advantage of discounts |
Optimizing your cash conversion cycle is vital for maintaining financial stability. But it’s a balancing act. Extending payment terms too far can damage supplier relationships, while paying too quickly can create unnecessary cash flow challenges.
Savvy eCommerce businesses align their payment terms with their sales cycles. For example, if your customers typically pay within 14 days but your suppliers expect payment in 30 days, you naturally have a cash flow advantage. On the other hand, if customers take 45 days to pay while suppliers demand payment in 15 days, you’ll need to address that gap with working capital or financing solutions.
Supply Chain Finance 101: Payment Terms, what is 2/10 net 30? $100K+/yr by age 30: simecurkovic.com
How to Optimize Supplier Payment Terms
Optimizing supplier payment terms means finding a balance between managing your cash flow and meeting supplier expectations in a way that benefits both sides.
Extending Payment Terms to Match Sales Cycles
One effective way to extend payment terms is by aligning them with your sales cycles and cash inflows. Chris Rauen, an expert in procurement and finance, explains:
"To optimize working capital, a simple rule of thumb is to pursue policies that help you get paid sooner, minimize your inventory requirements, and take longer to pay your bills."
Focusing on your largest suppliers can have the biggest impact on your cash flow. For new suppliers, it’s smart to establish payment schedules early on that sync with your cash cycles. Explaining how flexible payment terms can support steady or increased business volume might make suppliers more open to the idea. For existing suppliers, open discussions about how extended terms can help you maintain consistent purchasing - especially during seasonal ups and downs - can build trust and lead to agreements that work for both parties.
This approach essentially acts as interest-free financing. Many retailers, for instance, delay payments until after products are sold, freeing up working capital and reducing the need for external financing.
Next, consider how early payment discounts stack up against deferred payments for improving cash flow.
Early Payment Discounts vs. Delayed Payments
Choosing between early payment discounts and delayed payments depends on your cash flow, operational efficiency, and supplier relationships. Both options have their own advantages.
Early payment discounts can lead to noticeable cost savings. Businesses that consistently take advantage of these discounts report a 15% reduction in Days Payable Outstanding (DPO) and save an average of 8–12% on purchases. On the other hand, delaying payments provides more flexibility for managing working capital. In fact, over 60% of manufacturers cite cash flow challenges as the main reason for postponing supplier payments. However, delaying payments too much can strain supplier relationships, potentially damaging trust and collaboration.
The right choice depends on your business's financial stability, the efficiency of your accounts payable processes, and your goals for long-term supplier relationships. For new suppliers, offering early payment incentives - like small discounts - can encourage prompt payments and foster goodwill. For long-term suppliers, flexible payment plans that evolve gradually can help maintain strong partnerships.
Beyond timing, exploring alternative payment structures can provide even more flexibility.
Alternative Payment Term Structures
Traditional payment terms like Net 30 or Net 60 might not always align with your cash flow needs. Here are some alternative structures to consider:
- Dynamic Discounting: This approach offers flexible, real-time discounts based on the exact payment date. It allows both parties to optimize working capital by adjusting discounts according to when payments are made.
- End of Month (EOM) Terms: These terms align supplier payments with monthly cash flow cycles, making them a good fit for businesses with steady revenue or those that prefer consolidated payment processing.
- Hybrid Payment Structures: By combining early payment discounts with extended payment terms, this option balances cost savings with cash flow management, offering flexibility for businesses with varied needs.
- Payment in Advance (PIA): Prepaying suppliers can secure better pricing or priority access during high-demand periods. While it requires more upfront cash, the potential savings or improved supply reliability might make it worthwhile.
When considering alternative payment terms, it’s helpful to research what’s common in your industry to set reasonable expectations. If initial proposals aren’t accepted, finding a compromise can lead to arrangements that meet your needs while strengthening supplier relationships over time.
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Adding Payment Terms to Long-Term Financial Planning
Incorporating supplier payment terms into long-term financial planning requires embedding them into your forecasting, budgeting, and overall strategy. This process thrives on collaboration between procurement, finance, and operations teams. As Liudmila Gudina, Global Working Capital Manager at Fagron, aptly notes:
"Working capital is not just an operational metric - it is a strategic tool for cash generation."
To make this work, shift your focus from simply tracking KPIs to building actionable strategies that align payment terms with your operational cycles. Instead of relying on generic industry benchmarks, base your financial models on data from your top suppliers and procurement activities. This approach ensures assumptions are grounded in reality.
Keep your forecasting accurate by excluding one-off events and linking receivables and payables metrics to your actual operational cycle. Avoid using 12-month averages, as they can obscure critical seasonal patterns and disrupt cash flow timing. This level of precision lays the groundwork for managing supplier-specific risks, which we’ll explore next.
Managing Extended Terms and Supplier Risks
Managing risks within your financial strategy is essential, especially given recent trends. Between 2019 and 2021, the average length of payment terms in the U.S. nearly doubled, and they remain about 50% longer than before the pandemic. This shift has introduced new challenges that demand thoughtful oversight.
One of the biggest risks is strained supplier relationships. A survey conducted by BCG revealed that suppliers might raise prices by 5% to 8% if payment terms are extended by 15 to 30 days beyond typical industry standards. These price hikes could negate much of the working capital benefits you’re aiming for.
To address this, tailor payment terms to different supplier segments. Consider factors such as the supplier’s financial health, bargaining power, and your history of working together. Mike Bentson, Principal at INVERTO, underscores this approach:
"To maximize enterprise value, CFOs must define tailored strategies that consider supplier and category nuances."
One example comes from a global chemical company that worked with BCG to extend payment terms by up to 60 days for 200 North American suppliers. With a 55% acceptance rate, they also introduced a supply chain financing program to support suppliers facing cash flow challenges, offering reliable funding at lower interest rates.
Financial instability risks among suppliers also need close monitoring. Set up early warning systems to track the financial health of key vendors, especially smaller or at-risk suppliers. For these groups, consider excluding them from extended terms or phasing in changes gradually to avoid creating cash flow issues that could disrupt your supply chain.
When negotiating extended terms, opt for small, incremental adjustments rather than large, sudden changes. This measured approach helps protect supplier relationships while still advancing your working capital goals.
Payment Terms and Inventory Management
Aligning payment terms with inventory cycles is another critical piece of the puzzle. Payment terms directly influence inventory planning and cash flow, particularly during peak periods. The timing of when you pay suppliers versus when you sell inventory can either streamline cash flow or create costly mismatches.
Seasonal planning becomes especially important if your strategy includes extended payment terms. For instance, if you’re paying suppliers 60-90 days after receiving inventory but your sales cycles are shorter, you’ll need extra working capital to cover slow periods. On the flip side, aligning payment terms with sales cycles allows you to essentially use supplier financing to fund inventory purchases.
The financial impact is clear: cash flow can increase by 66% when payments are made within 30 days, yet the average payment duration in the U.S. reached 61 days in 2022. Businesses that can negotiate terms aligned with their inventory turnover rates stand to benefit significantly.
Accurate inventory forecasting becomes even more critical when extending payment terms. Poor forecasts can leave you with excess inventory, tying up cash while supplier payments come due. Instead of relying solely on traditional ABC classification methods, focus on inventory management strategies that prioritize cost and margin impact.
Stephanie Sims, founder of Finance-Ability, highlights the importance of proactive cash flow monitoring:
"For existing contracts, have an early warning system for your cash flow so you know right away if you're in the danger zone with vendors. Check the projection frequently - at least weekly, more often if you've got a high volume of transactions."
Adopt agile systems that allow you to adjust payment terms as business needs evolve. This flexibility is especially valuable during unexpected demand spikes or supply chain disruptions.
To further optimize working capital, consider implementing incentive programs or scorecards for your collections processes. Focus on improving processes rather than just chasing results to ensure your accounts receivable management keeps pace with any extended payables terms.
Using Funding Solutions to Bridge Cash Flow Gaps
Extended payment terms can help improve liquidity, but they often leave businesses grappling with cash flow gaps when customer payments lag behind supplier obligations. Even with careful planning and optimized payment terms, these gaps can still arise. External funding options provide a way to address these shortfalls without disrupting operations or straining supplier relationships.
In the U.S., 82% of businesses fail due to cash flow issues, and globally, 61% of businesses face challenges maintaining healthy cash flow. For eCommerce businesses managing inventory cycles and extended payment terms, these challenges can be even tougher to navigate.
Traditional bank loans often come with fixed monthly payments, which can strain cash flow during slower periods or when inventory is delayed, further exacerbating cash flow gaps. That’s where alternative financing models, like revenue-based financing, come into play.
Benefits of Revenue-Based Financing
Revenue-based financing (RBF) offers an approach that aligns repayment with a business’s revenue flow. Instead of fixed payments, businesses repay a percentage of their revenue. This means during slower sales periods - or when inventory delays occur - repayments automatically decrease, easing the pressure on cash flow. On the other hand, when sales pick up, repayments increase, allowing businesses to pay off financing more quickly.
Unlike traditional loans that may take weeks to process, RBF provides funding in just a few days. This quick turnaround is invaluable for eCommerce businesses that need to act fast on inventory opportunities or resolve unexpected cash flow gaps.
Daniel Lipinski, CEO and founder of Outfund, sheds light on how this model evolved:
"RBF is literally just taking a merchant cash advance and utilising payment processes, open banking and modern APIs to pull data and get information about that business to make a lending decision. That's essentially how it emerged from the old world to the new."
RBF also allows businesses to tailor repayment structures to their needs. For example, a business can set daily remittance rates to align with inventory costs. This repayment-as-you-earn model ensures financing costs naturally adjust to sales performance.
Another advantage is how RBF lenders use real-time data to assess risk and offer credit limits that grow with the business. Unlike traditional lenders relying on static financial statements, RBF providers analyze up-to-date sales data, giving them a clearer view of a business’s current performance and potential.
The growing confidence in RBF is evident in market trends. In 2019, the global revenue-based financing market was valued at $901.41 million, and it’s projected to reach $42.3 billion by 2027, with an annual growth rate of 61.8%.
One company leveraging this model effectively for eCommerce is Onramp Funds.
How Onramp Funds Supports eCommerce Businesses
Onramp Funds specializes in revenue-based financing tailored to eCommerce businesses. They integrate with platforms like Amazon, Shopify, BigCommerce, WooCommerce, Squarespace, Walmart Marketplace, and TikTok Shop, offering quick access to capital based on real-time sales data.
The results speak for themselves: Onramp Funds reports that their customers see an average revenue growth of over 60% after receiving funding, and 75% of their customers return for additional financing. This suggests that the financing structure not only meets short-term needs but also supports sustainable growth.
Jeremy, the founder of Kindfolk Yoga, shared his experience with Onramp:
"Onramp offered the perfect solution with revenue-based financing to secure the capital we needed to invest in inventory and pay it back at a reasonable time frame once we made sales. The process was quick, easy, and the support was great."
With funding available within 24 hours, businesses can seize opportunities as they arise. Unlike venture capital, there are no equity requirements, and unlike traditional loans, there are no personal guarantees. This means founders can retain full ownership and control of their businesses.
Onramp also prioritizes business stability. Their financing structures are designed to avoid overextending businesses with excessive debt. Payments adjust to sales performance, reducing repayment concerns during slower months or seasonal downturns.
For businesses juggling extended supplier payment terms, this financing model offers a strategic advantage. Companies can negotiate longer payment terms with suppliers while using revenue-based financing to purchase inventory. As sales roll in, a percentage goes toward repayment, while the rest supports operations and supplier payments.
Onramp Funds also provides flexibility with variable and fixed repayment options. This allows businesses to choose a structure that best aligns with their cash flow patterns and risk tolerance.
To qualify, businesses need to meet a few basic criteria: they must sell on supported platforms, generate at least $3,000 in average monthly sales, and operate as a legal business entity in the U.S.. These accessible requirements make RBF a practical solution for growing businesses that might not qualify for traditional bank loans.
Michele Romanow, president and co-founder of Clearco, highlights the appeal of this model:
"Revenue based financing is often a far more compelling proposition for Founders than venture capital or business loans, Because, primarily, Founders get to keep full ownership of their business rather than giving up equity - as is the case with venture capital - and there is no risk of default as there is with a loan."
Key Takeaways for Payment Terms and Working Capital
Managing payment terms effectively can significantly improve cash flow and working capital. Research highlights that payment terms directly influence cash flow, profitability, sales growth, credit availability, and supply risks. This makes them an essential part of any strategic financial plan.
The numbers paint a clear picture: 57% of invoices are paid late, and as many as 33% take over 90 days to settle. On the flip side, two-thirds of B2B sellers have reported increased sales after offering more flexible payment terms. To boost cash flow, consider extending terms with suppliers while shortening terms for customers. Negotiating these adjustments and offering early payment discounts can help balance cash flow without jeopardizing key relationships. These steps also create a foundation for addressing cash flow mismatches with strategic financing options.
Payment practices vary widely across industries, so it’s important to adapt your approach. Segment suppliers based on their importance and transaction value, and adjust payment strategies accordingly to maximize opportunities throughout the supply chain.
For eCommerce businesses dealing with cash flow gaps, revenue-based financing offers a flexible alternative to fixed-payment loans. Companies like Onramp Funds provide financing options where repayments are tied to sales performance. For instance, Onramp Funds charges around 1% of sales as a fee, with merchants often paying less than 1% of their gross merchandise value (GMV) to borrow up to 25% of their anticipated monthly revenue.
This model is backed by industry leaders:
"Working with on-demand ecommerce lenders like Onramp allows you to borrow what you need when you need it."
- Eric Youngstrom, CEO of Onramp
"By leveraging Onramp's tailored financing, our merchants can quickly secure the capital they need with repayment options that align with their revenue cycles."
- Christopher Yang, Co-President of SHOPLINE
Aligning financing with revenue cycles helps eCommerce businesses avoid cash gaps that could disrupt growth.
In short, payment terms are more than just operational details - they’re strategic tools for improving cash flow and driving long-term profitability.
FAQs
What are the best strategies for eCommerce businesses to negotiate payment terms with suppliers and improve cash flow?
To secure better payment terms and improve cash flow, eCommerce businesses can focus on extending payment timelines. For example, negotiating to pay suppliers 30 to 60 days after receiving goods gives businesses more time to hold onto cash and manage their working capital effectively. Another tactic is offering early payment discounts, which can encourage suppliers to agree to more flexible terms. At the same time, outlining late fees upfront helps avoid payment delays.
When negotiating, prioritize discussions with key suppliers and come armed with thorough market research to back your position. Building strong, trustworthy relationships with suppliers and proving your reliability as a business partner can also result in more favorable agreements. Together, these strategies help eCommerce businesses maintain a steady cash flow while continuing to grow and scale their operations.
What are the pros and cons of revenue-based financing versus traditional loans for managing cash flow in eCommerce?
Revenue-based financing (RBF) offers an appealing option for eCommerce businesses aiming to bridge cash flow gaps. Its standout feature? Repayments adjust based on your sales. This means when revenue dips, so do your payments. Plus, there’s no need for collateral, and businesses with steady income streams often find it easier to qualify. This setup is especially helpful for sellers looking to expand operations without the pressure of fixed monthly payments. That said, the trade-off is often higher costs, as repayments are tied to a percentage of your revenue, which can eat into profits.
Traditional loans present a different approach. They usually come with lower interest rates and fixed repayment schedules, offering predictability and potentially lower long-term costs. But qualifying can be tougher - strong credit and collateral are often required. And for eCommerce businesses, the rigidity of fixed repayment terms can be a challenge, especially when cash flow fluctuates.
Ultimately, the best choice depends on your business’s cash flow patterns, financial stability, and growth ambitions.
How do supplier payment terms affect cash flow and why does this matter for eCommerce businesses?
Supplier payment terms have a big impact on the cash flow and financial stability of an eCommerce business. When payment terms with suppliers are longer, businesses have to hold off on making payments, which can tie up cash and stretch out the cash conversion cycle (CCC). This delay can make it tougher to cover day-to-day expenses or put money into growth opportunities.
On the flip side, shorter payment terms with customers can help boost liquidity by speeding up cash inflows. For eCommerce businesses, managing these payment terms effectively is crucial to keeping operations running smoothly, especially in highly competitive markets. Flexible financing options, like those provided by Onramp Funds, can help fill cash flow gaps caused by extended supplier payment cycles, allowing businesses to grow without interruptions.
