How To Negotiate With Lenders and Suppliers During COVID-19

During the economic downturn related to the COVID-19 pandemic, it’s more important than ever to manage your cash flow and debt obligations. However, many small businesses are experiencing a difficult time making payments to their suppliers, vendors, and lenders to keep their businesses afloat. Negotiating can help. Here are steps to help you negotiate with lenders and suppliers for more favorable terms during this time.

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Who to negotiate with during an economic downturn

There are vendors and suppliers who might be easier to negotiate with if your cash flow is impacted. It’s a good idea to tackle the low-hanging fruit first before you spend time and energy on businesses that might make negotiations difficult. Here’s guidance on how you might approach negotiations.

More flexible:

  • Manufacturers
  • Direct service providers
  • Corporations or large companies
  • Financial institutions (banks, credit unions, etc.)
  • Large contracts

Less flexible:

  • Distributors
  • Small Businesses
  • Private landlords
  • Small contracts

Steps to take before negotiating

Before you start negotiating, have information and data at your fingertips. This will not only let you know where you stand but put you in a stronger position to approach your lenders and suppliers.

Contract review

Of course, you should have contracts in place for each lender and supplier. Review your contract to understand your rights and obligations. What are payment due dates and what triggers a payment obligation? What are late penalties? Is cancellation or termination without liability allowed? Contract language should address each of these questions.

Explore “Force Majeure”

Another important determination: Does the pandemic qualify as a force majeure event for delaying or deferring payments, or terminating the contract entirely? Some contracts include a force majeure clause, also called “impossibility” or “acts of God.” These provisions are intended to excuse performance of one or both parties under circumstances that weren’t reasonably foreseeable or avoidable, such as natural disasters or terrorist attacks. Ask an attorney familiar with commercial contracts to review the contracts for you and provide a recommendation on the best course of action if force majeure applies for coronavirus.

Examine all other operating expenses

An operating expense is incurred in carrying out an organization's day-to-day activities, but not directly associated with production. Operating expenses include payroll, sales commissions, employee benefits and pension contributions, transportation and travel, amortization and depreciation, rent, repairs, and taxes. Calculate so you know where you stand and how much leeway you need to stay financially healthy.

Cut costs when possible

Reduce your overall expenses. Though there are necessary costs associated with running a business, it’s easy to fall into unnecessary debt obligations. If you anticipate cash flow issues, eliminate those that aren’t absolutely necessary to operations. Similarly, a review of operations may also unlock opportunities to streamline procedures and cut costs. Some business owners already operating on the bare necessities and budgeting and trimming expenses isn’t an option. But areas of expenditure to review include office supplies, overhead costs, insurance policies, freelance or contract employees, travel, and more.

Initiate contact with lender and suppliers

It’s a bad strategy to ignore payments and communication with lenders and suppliers. Although small business financial problems are widely known, radio silence can make eventual negotiations tough. Reach out as early as you can after you determine the best course of action. Use your customer service skills here: Have an outcome in mind, be polite, and listen.

Identify other loans and lines of credit

If you’re in a good place to secure funding, explore your options. You may be qualified for low-cost funding to get you through business interruption. Some options include:

  • SBA 7(a) loans - If you qualify, SBA 7(a) loans are a fantastic funding option for small businesses. They have great rates, long repayment terms, and low monthly payments. To learn more about SBA loans, visit the SmartBiz Loans website.
    Bank term loans - Proceeds from a Bank term loan can be used in a variety of ways to help you through the pandemic. Funds can be used for working capital and more. Additionally, paying off a Bank term loan responsibly helps to build business credit. More information here.
  • Business line of credit - Only pay interest on the amount of capital that you borrow from your credit line. Our blog post, Best Lines of Credit for Small Business, goes into greater detail.
  • Invoice financing - With invoice financing, you sell outstanding invoices to a lender who advances you a portion of the invoice amount. Learn more here.
  • Business credit cards - An unsecured credit card can provide the fast funds you need while helping to build your credit scores. Our article, Six Benefits of Using a Business Credit Card, explains more.

Prepare an updated business plan regarding what you are doing in this challenging environment

Edit your business plan to include steps to remain operating after the pandemic business restrictions are lifted. Lenders want to know that you have a plan to return to full, on-time payments. If you don’t have a detailed business plan, now is a great time to put one in place.

Check out our comprehensive guide here: How to Write a Business Plan for Your Small Business (Without Going to Business School).

Ask for more than you need

It’s a standard move when negotiating – always ask for more than you need. Your lenders and suppliers will likely have a counter-offer after your initial request.

Determine your overall goal

Consider what your primary goals are when negotiating. Some options could be asking for a payment extension, reduced interest rate, or zero-interest rate on late payments. Interest rates have lowered since before the pandemic, so here’s a good opportunity to reduce your interest rate expense for the life of the contract.

How to negotiate with vendors and suppliers

Ask for trade credit

Trade credit is a two-way business transaction between a supplier and a buyer. Trade credit terms are agreed up front, often simply by one company deciding to do business with another. Usually, the supplier gives the buyer 30, 60 or 90 days to pay. This means you get the goods up front without handing over any cash. If you don’t already have tradelines with the vendors you buy from frequently, start there.

Another benefit when you have net terms in place with vendors is that it can help build your business credit. Request that your vendor reports your payment to business credit bureaus. (Not all do)

Explore lower interest charges

Lowering interest charges can give a business owner immediate financial relief in the form of lower payments. If you’re unable to alter interest in the long term, discuss getting a break in the short term.

Waiving late fees

Your customers or clients maybe paying invoices late, leaving you cash strapped. See if you can come to an agreement to have your late fees waived for the time being. It’s a win-win. Your vendors know they will be paid and you’ll get a break on tight payment deadlines.