Negotiating for better payment terms

Find out interesting insights with John Silverstein, VP, FP&A at Extreme Reach

Moderated by Srishti, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Srishti Rajveer: Hello, everyone! My name is Srishti Rajveer, and I’m a digital transformation consultant here at Hyperbots. Today, I’m delighted to have John as my guest. Thank you so much for taking the time, John.

John Silverstein: No problem. Happy to be here.

Srishti Rajveer: Definitely, and it’s always so great to host you. Just a little bit about John for our viewers—he is the VP of FP&A at Extreme Reach. Today, we’ll be discussing various late payment terms and leveraging AI for optimal financial management. So let’s begin. John, let’s start with a very basic question. Can you explain the different types of late payment terms and how they impact a buyer’s financial strategy?

John Silverstein: Yeah, sure. Late payment terms define the consequences of not adhering to the agreed-upon payment schedule. These terms can include penalties such as fixed fees, percentage-based interest charges, and more. A fixed fee might be $50 for every overdue invoice. The specifics depend on the industry and standard practices. A percentage-based fee could be 1.5% of the invoice amount, applied when payments are late. Interest charges accumulate over time, similar to a loan, which can add up but provides flexibility. These terms impact a buyer’s financial strategy by incentivizing timely payments. Adhering to payment terms can prevent disruptions, such as work stoppages, which may arise if vendors are not paid on time.

Srishti Rajveer: Understood. That makes sense. How do fixed fees as late payment penalties compare to percentage-based fees for buyers?

John Silverstein: Fixed fees are straightforward—you know exactly what you’ll pay, regardless of invoice size. For example, a $50 late fee applies to both small and large invoices, making it disproportionately high for smaller ones. On the other hand, percentage-based fees scale with the invoice amount. A 1.5% monthly charge on a large overdue invoice can become a significant penalty and impact cash flow. This type of penalty accumulates quickly, increasing overall costs. Buyers must weigh the predictability of fixed fees against the escalating costs of percentage-based charges when making payment decisions.

Srishti Rajveer: I see. That’s something to keep in mind. What role do interest charges play in late payment terms, and how should buyers approach them?

John Silverstein: Interest charges on overdue payments serve as a deterrent against late payments. They increase the amount owed over time, typically calculated daily. For example, a 12% annual interest rate translates to a 1% monthly charge. Negotiating lower interest rates or setting caps on maximum charges can be an effective strategy. This prevents excessive costs from accumulating. Buyers should also be aware of jurisdictional differences, as laws governing interest rates and penalties vary, especially in international transactions.

Srishti Rajveer: That makes sense. Can you describe how grace periods work in late payment terms and their benefits for buyers?

John Silverstein: A grace period is a buffer after the payment due date during which buyers can make payments without incurring penalties. For example, a 10-day grace period on a net 30-year term allows additional time for processing payments, which helps manage cash flow issues and administrative delays. However, buyers should use grace periods wisely to avoid habitual late payments, which can strain vendor relationships. Vendors factor in expected payment timelines when setting pricing, so frequent delays can increase costs for both parties.

Srishti Rajveer: I see. How can service stoppages or suspensions as a consequence of late payments affect a buyer’s operations?

John Silverstein: Service stoppages can severely disrupt business operations. If payments are overdue, vendors may halt the supply of goods or services, leading to production delays, revenue loss, and customer dissatisfaction. Additionally, habitual late payments may result in vendors changing payment terms, requiring prepayment or stricter conditions. This can strain cash flow further. For critical services, such as software subscriptions, access suspensions could bring business operations to a standstill. Buyers should prioritize payments for essential vendors and maintain clear communication to avoid disruptions. Vendors also track which clients consistently pay on time, which can influence future business relationships and credit terms.

Srishti Rajveer: Absolutely. What are the implications of collections and legal action for buyers facing persistent late payments?

John Silverstein: If late payments persist, vendors may escalate to collection agencies or legal action to recover the amounts owed. This impacts not just the overdue invoice but also includes penalties and legal costs. Collections can damage a buyer’s credit score, making it harder to secure financing or favorable payment terms in the future. Industry reputation also suffers, as other vendors may become hesitant to do business with a buyer known for late payments. Legal fees add to financial burdens, and failure to resolve disputes could even lead to bankruptcy in extreme cases. Proactively managing payment issues through communication with vendors is essential to avoid these consequences.

Srishti Rajveer: That’s a serious impact. How do negative credit reporting and future credit term restrictions influence a buyer’s approach to late payments?

John Silverstein: When late payments are reported to credit bureaus, they lower the buyer’s credit score. This affects borrowing ability and may result in reduced credit limits from vendors.

Buyers with a history of late payments might face shorter payment periods, higher penalties, or even cash-on-delivery requirements. This can significantly strain cash flow, making it difficult to operate smoothly. In extreme cases, it can lead to financial instability and business closure.

Srishti Rajveer: That’s a huge impact. What strategies can buyers employ to mitigate additional charges and costs associated with late payments?

John Silverstein: Open communication and negotiation with vendors are key. Buyers should align vendor payment terms with their own customer payment cycles to prevent cash flow mismatches. Monitoring due dates, negotiating lower penalties, and setting caps on additional charges can also help reduce financial strain. Proactively addressing potential delays with vendors may lead to more flexible terms, avoiding unnecessary fees.

Srishti Rajveer: Absolutely. How can incentives for early or on-time payments benefit buyers in managing late payment terms?

John Silverstein: Early payment incentives can improve cash flow and profitability. For example, a “2/10 net 30” term provides a 2% discount if payment is made within 10 days. While these discounts improve margins, buyers must assess whether taking advantage of them aligns with their cash flow situation. Loyalty programs and rewards for on-time payments can also enhance vendor relationships and improve future credit terms.

Srishti Rajveer: Understood. What are flexible payment arrangements, and how can they serve as alternatives to strict payment penalties?

John Silverstein: Flexible payment arrangements include structured payment plans, temporary extensions, or installment payments. Instead of requiring full payment upfront, vendors may accept partial payments over time. These arrangements benefit both parties—buyers gain financial flexibility while vendors receive consistent cash flow. Negotiating these terms in advance prevents financial strain and maintains business relationships.

Srishti Rajveer: Very interesting. How does Hyperbots’ Payment AI Copilot assist in identifying and optimizing late payment plans for buyers?

John Silverstein: Hyperbots’ Payment AI Copilot leverages machine learning to analyze payment patterns and industry benchmarks in real time. It identifies frequent late payments, suggests optimal payment strategies, and helps negotiate better terms with vendors. By proactively managing payment schedules and offering insights into cost-saving opportunities, the AI Copilot empowers buyers to minimize penalties, improve cash flow, and enhance vendor relationships.

Srishti Rajveer: That’s incredible! Thank you, John, for sharing these valuable insights.

John Silverstein: My pleasure. Happy to be here!