When a cash-rich corporate customer offers to pay early – in exchange for a discount, naturally a business owner will pause for thought. Do they protect margin? Or is faster accessible cash more valuable? ABN AMRO’s London Sales Director, Ryan Whitworth has seen this problem first hand – and says the answer comes down to strategy.
The technical term is “settlement discounts”. But for many businesses, earlier payment in exchange for lower pricing is a huge dilemma. Take the cash earlier, pushing down your working capital? Or do you protect your margins?
We’re seeing that decision crop up more as large corporate customers look for ways to deploy their growing cash reserves in profitable ways. But it’s not a new problem.
Before I joined ABN AMRO I ran a business supplying a relatively generic service to a well-defined audience. That meant we didn’t have much option to shop around – but many of our customers did. Then a government department, one that we had a long-standing relationship with, asked whether they could get a 4% discount by shifting their payment terms from 60 days to 15.
Margins simply weren’t that fat to begin with. A 4% hit would make the business with them barely profitable – regardless of the cashflow benefit. And we didn’t actually need the cash.
So at that point, the challenge was less about the raw financials and more about having that conversation in a way that sustained the relationship.
But what I learned then was that the decision is never just about your immediate cashflow needs. You have to weigh up operational realities, calculate the long-term impact of decisions and align them with strategic plans. Here’s a checklist:
Don’t rush into a decision. If cash is tight – and your suppliers know it – it can be tempting to rush into settlement discounts with your own customers to avoid a squeeze on your payables. But there are often ways to handle a cash crunch that don’t erode margins. Take time to explore the options.
Evaluate your market position. If you’re offering a relatively replaceable product or service, what differentiates you is service. Without a strong brand or unique IP, you’ll have trouble dictating terms – make the offering relevant to your audience so the benefit goes both ways. That means a realistic assessment of the balance of power between you and the customer is the key factor
Assess your wiggle room. If you’re planning to buy a business, or make a major investment, generating cash gives you options. But if margins are thin to begin with, setting a new, lower, floor on pricing might set a dangerous precedent. Existing limitations on either margins or cash will often dictate your decision.
Crunch the numbers. For example, a customer paying on 15 days rather than 60 might ease a cash squeeze – but that means a 4% discount. Might there be ways to accelerate the cash in the transaction that cost less than 4%? Don’t make the call until you’ve costed the financing options that yield the same cash outcome.
Consider industry norms. Whether you’re offering or seeking a settlement discount, if it’s out of step with sector peers, that can cause problems. And a recruitment business, say, has very different options from those a manufacturer has. Sector characteristics will also affect financing options – so don’t settle for an off-the-peg solution.
Look for your own settlement discounts. If you can borrow at rates that are lower than the discount you might secure from your own suppliers for early payment, you create options to manage margins at the other side of the value chain.
Align with your long-term strategy. How will a change in terms affect your pricing power down the line? What about customer relationships over the long term if you say no? And what about future events, such as acquisitions or investments? What overall cash profile will support them? This kind of decision looks simple. But it has to take into account financial strategy, operational parameters and customer relationships.
Take the seasonal manufacturing business we’ve been working with recently. In the peak months, its plant is running triple shifts to meet demand. Out of season, it’s ticking over on single shifts at best.
One option is to discount prices out of season and attempt to stoke demand and smooth cashflow. But the leadership team weren’t just looking at the cash. Conditioning their customer base to lower prices was, effectively, a cost to the business. The best strategic call therefore was protecting margins – and finding other ways to manage the cash in the quieter periods.
As a manufacturer with property, plant and stock, we were able to help them deliver on that decision over and above standard receivables financing. But we speak with many businesses whose experience of finance providers has left them blinkered about their options. We encourage them to think holistically – looking at all their assets across the balance sheet, their operations and strategy as a whole. There are usually more choices available.
So even if you have an existing relationship with a finance provider, it really does pay to look at your options. These kinds of decisions look like they have purely financial answers. But when you work with finance providers who take a more rounded view of your business and can offer a more consultative approach, you develop ways to make smarter choices.
Clients value the behaviours of their funding partners, particularly when times are hard. Consumers are becoming more savvy as to what value looks like and discounts aren’t necessarily it. This consultative approach is a key differentiator alongside a holistic funding solution to support continued growth.