For any business, suppliers are the backbone of operations. Whether you’re a baker sourcing flour, a boutique stocking a new collection, or a tech startup paying for software, your ability to get what you need depends on these partnerships. At the heart of every supplier relationship lies one key process: payments.
Managing these payments effectively is more than just a bookkeeping chore; it’s essential for your company’s financial health and building trust with the partners who keep your business running.
At Remitly, we know that many of our customers are entrepreneurs and small business owners navigating these challenges. This guide will simplify the world of supplier payments, covering what they are, the different types, how they work, and the best practices that can turn your payment process into a real business advantage.
What is a supplier payment?
Let’s start with a clear and simple definition. A supplier payment is the process of paying for goods or services purchased from a supplier or vendor. This could include raw materials, inventory, office supplies, or professional services like marketing or accounting.
More than just a transaction
While it’s fundamentally a financial transaction, a supplier payment represents much more. It’s the fulfillment of your end of a business agreement. The way you handle these payments, whether they are timely, accurate, and communicated clearly, sends a message to your suppliers about how reliable and trustworthy your business is as a partner.
The foundation of your supply chain
Think of supplier payments as the lifeblood of your business operations. When the process runs smoothly, your business gets the resources it needs without interruption. But delays or errors can quickly disrupt your supply chain and impact your ability to serve customers.
Why mastering supplier payments matters
Effectively managing payments to suppliers isn’t just “good business,” it has tangible benefits that can directly impact your bottom line and long-term success. Done right, it builds stronger partnerships, protects your supply chain, and even opens doors to new business opportunities.
Building strong, lasting supplier relationships
Suppliers, like any business partner, want to work with clients who are reliable. When you consistently pay on time and as agreed, you become a preferred customer. This builds an invaluable foundation of trust and goodwill.
The hidden cost of late or inaccurate payments
Delays or mistakes can be expensive. At best, you’ll face late fees and strained relationships. At worst, a supplier might walk away, leaving you scrambling to find a new partner, a process that drains both time and money.
Unlocking better terms and preferred treatment
A strong payment history can give you leverage. A supplier who trusts you is more likely to offer you better terms in the future, such as extended payment deadlines (Net 60 instead of Net 30), discounts for early payment, or priority access to limited inventory during busy seasons.
The main types of supplier payment terms
Supplier payments aren’t one-size-fits-all. The terms you agree upon with your supplier determine when payment is due and can affect your cash flow. Here are the most common arrangements:
Payment in advance (prepayment)
This is exactly what it sounds like: you pay for the goods or services in full before you receive them.
- When it’s used: This is common when working with a brand-new supplier, ordering custom-made goods, or securing resources that are in high demand. It’s a way to show good faith and guarantee your order.
- Pros: It can help you lock in a price and build trust with a new vendor.
- Cons: It can be risky if the supplier doesn’t deliver and puts a strain on your immediate cash flow, as you’re paying for something you haven’t received yet.
Post-payment (net terms)
One of the most common B2B arrangements, where you receive goods or services first and pay later within an agreed period.
- Common terms: You’ll see this written as “Net 30” or “Net 60,” meaning full payment is due within 30 or 60 days of the invoice date.
- Early-payment discounts: Sometimes, you’ll see terms like “2/10 Net 30.” This means you can take a 2% discount if you pay the invoice within 10 days; otherwise, the full amount is due in 30 days.
- Pros: Improves cash flow by giving you time to use or sell the goods before paying.
- Cons: Requires careful tracking to avoid missed payment deadlines.
Partial and milestone payments
For large, expensive, or long-term projects, payments are often broken down into stages.
- When it’s used: Common for things like construction projects, large custom equipment orders, or extensive software development contracts. A typical breakdown might be 30% upfront as a deposit, 40% upon reaching a key project milestone, and the final 30% upon completion.
- Pros: Shares risk equally and makes large projects more financially manageable.
- Cons: Demands clear progress tracking to ensure payments align with deliverables.
How supplier payments work: The step-by-step process
The journey from placing an order to a supplier being paid involves several key steps. Understanding this workflow helps keep your accounts payable process organized.
Step 1: The purchase order (PO)
For many businesses, the process starts when you send a purchase order to the supplier. This is a formal document that officially orders the goods or services and specifies quantities, prices, and delivery details.
Step 2: The invoice
After the supplier has delivered the goods or services, they will send you an invoice. This is the formal bill. It will reference the PO and detail how much you owe, the payment due date (based on your agreed-upon terms), and how to pay.
Step 3: Invoice processing and approval
Once you receive the invoice, your team needs to verify it. This involves a “three-way match” to confirm that the details on the invoice match the details on the purchase order and the packing slip (the document that came with the goods). This prevents you from paying for items you didn’t order or receive.
Step 4: Payment execution
Once the invoice is approved, it’s time to send the money. Common payment methods in the US include:
- ACH (automated clearing house) transfers: Low-cost electronic bank transfers, though they can take a few business days to process.
- Wire transfers: Faster and ideal for large or international payments, but they come with higher fees.
- Credit cards: Paying by credit card is fast and offers benefits like rewards points and buyer protection. However, not all suppliers accept them, and processing fees can apply (typically 2-3%).
- Checks: Many businesses still use paper checks, though they’re slower and more prone to errors or delays.
Common challenges in supplier payments (and how to solve them)
Even with a clear process, paying suppliers isn’t always smooth sailing. From missed deadlines to international hurdles, here are the most common challenges and how to handle them.
Challenge 1: Late payments
- The problem: Disorganization, cash flow issues, or manual errors can lead to missed deadlines, resulting in late fees and strained supplier relationships.
- The solution: Use calendar reminders or accounting software with automated payment scheduling. If you know you’ll be late due to a cash flow issue, communicate proactively with your supplier. Most are willing to be flexible if you are transparent.
Challenge 2: International payments
- The problem: Paying overseas suppliers often means high wire transfer fees, exchange rate losses, and longer transfer times.
- The solution: Use a service designed for international business payments. Platforms like Remitly offer competitive exchange rates and lower fees than traditional banks, making the process simpler and more affordable.
Challenge 3: Manual errors
- The problem: Manually entering invoice data can lead to errors, such as paying the wrong amount or even paying the same invoice twice.
- The solution: Switch to digital accounting software like QuickBooks or Xero. Automated invoice processing reduces the risk of human error.
Turning payments into partnerships
Effectively managing your supplier payments is a fundamental business discipline. It’s about more than just moving money; it’s about building a reputation for reliability and fostering strong, trust-based partnerships that will support your business as it grows.
When you establish clear processes, leverage digital tools, and prioritize timely payments, you can turn your accounts payable system from a simple cost center into a tool for building a resilient and successful business.
FAQs
What are the most common methods for supplier payments?
The most common methods for business-to-business payments in the US are ACH transfers for domestic payments due to their low cost, and wire transfers for large, urgent, or international payments. Credit cards and checks are also used, but are generally slower and less efficient.
How do late supplier payments affect my business?
Late payments can have real consequences. They can lead to late fees, damage your business credit, and strain your relationship with your suppliers. A frustrated supplier might prioritize other customers, or even refuse future orders, disrupting your operations.
How can I streamline our supplier payment process?
Set clear terms upfront, use accounting software to automate invoice processing and payment reminders, and keep communication open with suppliers. A dedicated supplier payment system can make the process faster, more accurate, and stress-free.
What is the difference between an invoice and a purchase order?
A Purchase Order (PO) is sent by the buyer to officially place an order. An invoice is sent by the supplier afterward to request payment for the delivered goods or services.