Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Used Payment Terms to Cut Costs 8 Percent
Transcript
- Lucas: You know that moment when a supplier says, 'We can't lower the price,' but you can tell there's room — just not on the unit cost itself. Luna: Right, you're stuck. Unless you shift the conversation away from price and toward something else they value. Lucas: Exactly. And that something else is often time — specifically, when you pay them. So today I want to look at how one buyer used payment terms to cut procurement costs by about 8 percent without ever asking for a lower unit price. Luna: Eight percent just from changing when the money changes hands? That's significant. Who was this buyer? Lucas: A purchasing manager at a mid-sized packaging company in the Midwest — we'll call her Sarah. She was sourcing corrugated board and plastic film, two categories where suppliers were really tight on margin. Every time she tried to negotiate a price reduction, they'd say the raw material costs were too volatile. Luna: So she looked at their payment terms instead. What did she find? Lucas: Her company had a standard net-60 policy. Pay suppliers in 60 days. That's pretty common in packaging. But she realized that many of her suppliers — especially the smaller ones — were cash-constrained and would happily trade a discount for faster payment. So she offered them net-15 or net-30 in exchange for a 1.5 to 2 percent price concession. Luna: And they bit? Lucas: About 40 percent of them did. The rest were either large enough that cash flow wasn't a pain point, or they were already factoring their receivables and didn't see the benefit. But for those who took the deal, Sarah effectively locked in a 1.5 to 2 percent discount on every invoice. Luna: That's like getting a price cut without calling it a price cut. But does that actually add up to 8 percent overall? Lucas: It did in her case, because she combined it with the flip side: extending terms for suppliers who didn't need early payment. Some of her larger suppliers were fine with net-60, even net-90, because they had low cost of capital. By pushing those out, she improved her own working capital and used the freed-up cash to fund the early payments to the smaller suppliers. Luna: So she wasn't just asking for discounts — she was rebalancing the whole payment portfolio. That's pretty sophisticated for a mid-market company. Lucas: It is. But she had to get the CFO on board, because accelerating payments means spending cash faster. The CFO's initial reaction was, 'Wait, you want to pay people earlier? That hurts our cash conversion cycle.' But Sarah showed him that the weighted average cost of the discounts was about 9 percent annualized — and their cost of capital was around 5 percent. So they were effectively earning a 4 percent spread. Luna: That's the key metric. If the discount rate is higher than your cost of capital, it's a win. Lucas: Exactly. In her case, a 2 percent discount for paying 45 days early works out to about 16 percent annualized — way above their cost of capital. Even a 1 percent discount for 30 days early is over 12 percent annualized. So the CFO signed off. Luna: Were there any suppliers who pushed back? I imagine some might feel like you're pressuring them to take a discount. Lucas: A few did. They saw it as a squeeze. But Sarah framed it as optional — 'Here's a menu: you can keep net-60 at the current price, or you can choose net-15 at a 1.5 percent lower price.' It was their choice. And she made sure the discount wasn't so aggressive that it hurt their margin. She actually ran their financials to confirm they'd still be profitable. Luna: That's smart — protecting the supplier relationship while still capturing savings. Did she use any technology to manage this, or was it all manual? Lucas: She started manually, but within six months she adopted a dynamic discounting platform — basically a web portal where suppliers could log in and see offers: 'If you invoice today, you can choose net-15 for a 1.8 percent discount, net-30 for 1 percent, or net-60 for no discount.' The platform automated the approvals and the cash flow forecasting. Luna: Dynamic discounting is a pretty established tool in large enterprises, but I think mid-market companies often don't realize they can access it through their ERP or through third-party fintechs. Lucas: Right. Sarah's company was using a mid-tier ERP, and she found a platform that integrated with it. The setup cost was about $15,000, and she calculated a payback period of less than two months based on the discounts she was already capturing. Luna: So the savings were real and fast. But I want to ask about the risk side — what if a supplier that took early payment later runs into financial trouble? You've already paid them, so you lose leverage. Lucas: That's a real concern. Sarah mitigated it by only offering early payment to suppliers she'd vetted — ones with strong credit profiles and long relationships. She also capped the early payment percentage per supplier to avoid overexposure. And she kept a reserve of cash in case any supplier needed to revert to standard terms. Luna: Sounds like a careful rollout. What was the final tally? You said 8 percent overall cost reduction — how did that break down? Lucas: About 5 percent came directly from the early payment discounts on the 40 percent of spend that adopted them. The other 3 percent came from extended terms on the remaining 60 percent — suppliers who stayed at net-60 or went to net-90. That extension improved her company's days payable outstanding by about 12 days, which reduced their need for short-term borrowing and saved on interest. Luna: So it's not just a discount play — it's a working capital optimization. And it works best when interest rates are low, right? Because the cost of capital is low, so the spread is bigger. Lucas: Exactly. In a high-rate environment, the math gets tighter. But right now — mid-2026, with rates having stabilized after the hikes — the spread is still favorable for most buyers. Sarah's company locked in those terms two years ago and has been renewing them annually. Luna: I think a lot of procurement teams overlook payment terms because they think it's a finance function issue. But Sarah's story shows it's really a procurement lever — you just need to partner with the CFO. Lucas: Absolutely. And it doesn't require a huge overhaul. If a buyer has a supplier that's been around for years and always pays on time, asking 'Would you prefer net-30 at a 1 percent discount?' is a low-risk conversation. Even if only one in ten says yes, that's a pure saving. Luna: One thing I want to circle back to — you mentioned she ran their financials. How much due diligence did she do? Is that typical for a mid-market buyer? Lucas: She didn't do a full audit, but she asked for a few key data points: their typical days sales outstanding, their cost of borrowing, and their profit margin on her business. If a supplier had razor-thin margins and high debt, she wouldn't offer early payment because they might become dependent on it. She wanted suppliers who were healthy enough to choose freely. Luna: That's a good rule of thumb. You don't want to create dependency. You want mutual benefit. Lucas: Right. And the beauty of this approach is that it's reversible. If a supplier's situation changes, you can revert to standard terms. It's not a permanent price cut — it's a flexible arrangement. Luna: I'm curious — did Sarah track the impact on supplier satisfaction? Did the early payment suppliers rate her higher? Lucas: They did. In her annual supplier survey, the ones on early payment gave her company higher marks on 'ease of doing business' and 'financial partnership.' That's an intangible benefit that's hard to quantify but real. Luna: So the takeaway: payment terms are a negotiation variable that can lower costs without lowering prices. And it's especially powerful when you segment suppliers by their cash flow needs. Lucas: Exactly. And it's something any buyer can try this week. Look at your top 20 suppliers by spend. Check your current payment terms. Then ask yourself: which ones would value faster payment? You might be surprised. Luna: Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these episodes. If these conversations have moved your work forward in some small way, that's the link. Lucas: Yeah, we keep the show ad-free because of that support. It's a small group, but it makes a big difference. So thank you to those who do. Luna: Alright, back to Sarah. She told me one of her biggest surprises was how much the CFO's perspective shifted after seeing the numbers. He went from skeptical to being the champion of the program. Lucas: That's the thing — once you frame it in terms of return on working capital, finance gets excited. And once procurement shows they can deliver savings without damaging supplier relationships, it builds credibility across the company. Luna: So if you're a buyer listening, maybe start with one supplier this month. Just ask the question. Lucas: That's the best first step. And if it works, you've got a repeatable model. For next time, we're going to look at how one buyer used supplier-managed inventory to cut stockouts by 40 percent. See you then.