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.
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:
Less flexible:
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.
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.
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.
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.
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.
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.
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:
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).
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.
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.
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)
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.
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.