Longer payment terms to win contracts: the cost
What a telecom provider gives up when it offers business customers longer payment terms to win a contract, and how to watch the effect afterwards.
By Achekam · · 5 min read · For Telecoms businesses in South Africa, Nigeria, Kenya
The tender is close. A logistics company wants connectivity for its depots, and your price is in line with the other two bidders. Then their procurement manager says the deciding factor will be payment terms: the competitor has offered to wait longer for payment, and could you match it?
Saying yes feels free. The contract is the same size, the margin is the same, and the customer still pays in the end. But longer terms are a loan to your customer, and loans cost money. This article sets out what that loan costs a provider, how to decide whether it is worth it, and how to keep an eye on the result once the contract is running.
What you are really agreeing to
ACCA explains that a business's trade receivables balance depends on three things: the value of its credit sales, the period of credit it gives, and how efficiently it bills customers and collects overdue accounts. Lengthening the credit period moves the second lever. Even if nothing else changes, more of your money sits in customers' hands at any moment.
For a provider, that matters more than in many industries. You pay for upstream bandwidth, tower rentals, equipment and installers' wages month by month, often in advance. Every extra week a large customer takes to pay is a week your business funds their connectivity from its own cash or its overdraft.
ACCA's technical article on working capital management puts the risk bluntly: extending customer credit to win sales can reduce cash, push the business into an overdraft, and cost more in interest and bad debts than the extra sales earn.
Two costs that can swallow the margin
The cost of waiting
The first cost is financing. If your account is in overdraft, the interest on the unpaid invoice for the extra days is a real expense. If it is not, the money you are waiting for is money you cannot use to pay a supplier early for a discount, or to fund the next network build without borrowing.
A simple way to think about it in words: take the monthly invoice for the contract, multiply it by the extra time you are giving, and apply the interest rate on your overdraft. That is roughly what the longer terms cost you each month, before any risk of non-payment.
The cost of not being paid at all
The second cost is bad debt. Investopedia explains that lower credit standards boost sales but also increase bad debts. Longer terms are one form of lower credit standards: you are trusting the customer for longer, and a customer who runs into trouble during that time owes you more when it does.
Put the two together and compare them with the contract's gross margin. If the interest and the extra risk eat most of the margin, you have won a contract that keeps your team busy and earns very little.
Better ways to win the deal
Investopedia suggests that companies short of working capital improve cash flow by negotiating better terms with both suppliers and customers, extending credit carefully to keep bad debts down, and avoiding unnecessary borrowing. In a tender, that points to alternatives worth offering before you simply match the longer terms:
- Longer terms on equipment only. Spread the installation and equipment cost, but keep the monthly service on your standard terms.
- Longer terms after a track record. Standard terms for the first months, moving to longer terms once the customer has paid on time.
- A price instead of a delay. A small discount for paying on your standard terms can cost you less than the financing.
- Terms tied to the size of the account. The more depots connected, the more you have at risk, so the case for longer terms weakens as the contract grows.
If you do agree longer terms, write them into the contract exactly, along with what happens when a payment is late.
Getting the terms right on every invoice
Agreed terms only help if the invoices state them. In Achekam, invoices default to 30-day terms. A business creates each customer invoice as a draft it can change or delete, so for a customer on different terms, check the due date on the draft before issuing it. Issuing takes the next number in the sequence and posts the invoice to the ledger as debtors, sales and output VAT.
Make the check a habit for every customer with non-standard terms, because an invoice that shows the default terms when the contract says otherwise is exactly the kind of error that starts a dispute. A list of customers on special terms, kept beside whoever issues the month's invoices, avoids most of these. How monthly invoices for subscribers are put together is covered in monthly subscriber invoices.
Watching the aged debtors after the change
Once the contract runs, watch what the longer terms actually do. Receivables in Achekam are aged into 0-30, 31-60, 61-90, 91-120 and over 120 days, with overdue totals. Look at that report each month for the customer and for the whole book:
- Is the customer paying on the new due date, or treating it as a starting point?
- Are their invoices drifting into older bands?
- Has the total owed by all customers grown faster than your sales?
If other customers start asking for the same terms, the change can spread quietly across the book. What a rising DSO tells a provider explains how to spot that drift early.
Reminders that follow the agreed terms
Credit control in Achekam is on for new workspaces. Once a day it e-mails overdue reminders, by default at 7, 14 and 30 days overdue with the invoice PDF attached, and a monthly statement to every customer with a balance. It never charges anyone, and it records whether each e-mail went out. It needs working e-mail settings to send.
Because the reminders count from when an invoice becomes overdue, an invoice with correct longer terms is not chased early, and an invoice with the wrong terms will be. That is one more reason to check the due date on every draft. When the customer asks where they stand, a statement of account can be produced as a PDF and e-mailed, and the screen says whether it was sent.
The decision in one line
Agree longer terms only when the contract's margin still looks worthwhile after you have priced in the interest on the wait and the risk of not being paid, and only when you will check the invoices and the aged debtors every month afterwards.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
