Many SMEs source raw materials and goods from overseas suppliers, making these relationships crucial to their operations.
We are surrounded by imported goods. Walk along the aisles of any supermarket and you will find thousands of them. The cars we drive are either imported or made of imported goods. Many companies would simply not be able to operate in the same way without imports.
However, with the UK currently negotiating its withdrawal from the EU, the relationships that UK businesses have with EU suppliers could become strained. The EU is the UK’s largest trading partner, with UK imports from the EU accounting for 53% of all UK imports in 2017.1
At a time when business costs are rising, many SMEs should be renegotiating contracts with suppliers to protect their profit margins.
While it is common practice to negotiate with suppliers, Brexit uncertainty means that businesses will need to do so tactfully, so as not to damage the relationships they have worked hard to build.
In fact, if done correctly, negotiating with suppliers can benefit both sides, protecting the relationship while also securing the discount needed to boost profit margins. There are several strategies SMEs should consider in order to successfully negotiate with suppliers.
How to successfully negotiate
One route SMEs could take to secure a discount is to offer to pay for goods in advance of them being shipped by the supplier. Over a quarter of global trade transactions involve cash-in-advance payment to suppliers, according the IMF and the Bankers Association for Finance and Trade.
If you don’t already, you could offer to pay for goods in advance, and use this advantage to secure a discount.
Suppliers may be more open to offering a discount if they are paid in advance, as receiving payment upfront helps them to better manage their cash flow. However, it can also weaken cash flow for the company ordering the goods.
If you don’t want your cash flow to take a hit, there are Trade Finance facilities available that can fund advance payments, protecting your own cash flow.
Throughout the negotiation process, it is important to think like the supplier. If they see your business as a high-growth company with a good track record, they will be more willing to partner with you and offer favourable rates to ensure they benefit from your future growth.
Focusing on the long-term can therefore be a useful way to encourage the supplier to invest more in the relationship. However, be careful not to overpromise, or it could cause difficulty further down the line if you don’t deliver.
It is also crucial to research the cost of goods beforehand. By knowing the prices offered by your supplier’s competitors, it can help you to work out roughly how much room there is for negotiation, putting you in a stronger position.
However, it is best to avoid mentioning how much other suppliers charge for the same product, as this could damage the relationship you have with your existing supplier by undermining your loyalty to them.
Ultimately, suppliers are more likely to offer discounts and favourable rates if you work to establish your business as a trusted and loyal partner.
Businesses should negotiate by providing win-win solutions that benefit the supplier, and you can then use that to your advantage to secure discounts.
Phil Tobin is managing director for trade finance at Bibby Financial Services.