The hidden cost of bad payment terms and how to fix them

Cashflow, not competition, kills most small businesses. In the UK, 62% of small businesses are owed money from unpaid invoices, with an average of £21,400 outstanding.

Yet many leaders treat payment terms as a back-office detail. They ignore the growing gap between what customers demand and what suppliers need, until the shortfall hits their bank balance.

This article calls out why bad payment terms are a silent killer, why attempting to chase invoices harder is a weak response, and how to build terms that balance suppliers, customers, and cashflow without burning bridges.

The cost of ignoring payment terms

Most startups and SMEs don’t fail because they run out of ideas. They fail because they run out of cash.

Payment terms sit at the heart of this. If you’re paying suppliers on 30 days but collecting from customers on 60 or 90, you’re effectively funding someone else’s business. 

That gap forces you to rely on overdrafts, expensive credit, or founder loans. None of these options are sustainable.

The real damage isn’t just financial. Bad terms create a number of issues, including: 

• Strained supplier relationships. Constant delays and renegotiations erode trust.
• Operational risk. A single large unpaid invoice can throw off payroll or critical spending.
• Missed opportunities. When cash is locked in receivables, you can’t reinvest in growth.

Cashflow gaps turn everyday pressure into long-term vulnerability.

Why chasing invoices harder won’t solve the problem

Too many founders fall into the trap of hiring credit controllers, sending firmer emails, or threatening late fees as their only strategy.

The truth is that chasing invoices is treating the symptom, not the real issue. 

If your underlying payment terms are mismatched, no amount of persistence will fix the imbalance.

In addition, aggressive chasing can damage customer relationships. What feels like being diligent to you can feel like desperation to them. That reputation spreads fast in small industries.

Instead of doubling down on chasing, leaders need to design smarter terms upfront which balance supplier obligations with realistic customer timelines.

A framework for healthier payment terms

To break the cycle, treat payment terms as part of your operating model.  

Here’s a simple framework:

1. Map the gap. Lay out your average supplier terms (e.g. 30 days) against your average customer terms (e.g. 60 days). The delta is your financing risk.
2. Segment customers. Not every client deserves the same terms. Offer stricter terms for newer or smaller clients and reserve extended terms for strategic accounts where volume offsets risk.
3. Negotiate suppliers, not just customers. Many SMEs forget that supplier terms are just as negotiable. If you’re growing fast, suppliers may accept extended terms in exchange for guaranteed volume.
4. Build buffers. Even with better alignment, late payments happen. Maintain a working capital buffer or revolving facility to smooth the bumps.
5. Review quarterly. Market conditions change. Revisit terms at least every quarter to ensure they’re still aligned.

The role of transparency

One of the most underrated tools in fixing payment terms is communication. 

Suppliers can tolerate tighter terms if they trust you’ll stick to them. Customers can handle shorter terms if you explain why.

Transparency looks like:

• Explaining context. Share openly with suppliers why you need extended terms (e.g. seasonal cashflow, planned growth).
• Setting expectations. Tell customers exactly when you’ll invoice and when payment is due. 
• Following through. Nothing destroys trust faster than promising consistency, then failing to deliver.

Research from EY shows that companies who communicate openly with suppliers build more resilient relationships, especially in volatile markets.

Trust can’t erase bad terms, but it can make tough terms workable.

How to fix payment terms before they sink you

Bad terms aren’t inevitable. Leaders can get ahead of the risk by:

• Auditing gaps between customer and supplier payment terms.
• Building flexibility into contracts, instead of one-size-fits-all terms.
• Aligning incentives through equity or revenue-sharing, so suppliers feel invested in your growth.
• Being ruthless about enforcing agreed terms because consistency beats one-off negotiations.

Summary

Payment terms are a key part of your growth strategy. Ignore them, and you’ll quietly bleed cash until one bad month pushes you over the edge.

The fix isn’t chasing invoices harder. It’s aligning terms across suppliers and customers, building buffers, and leading with transparency. 

Do this, and you’ll turn cashflow from a lurking risk into a source of stability.

Vestd helps founders and leaders design and manage share schemes that align teams, improve retention, and build long-term value. Book a call to find out how.