Improve your Business Financing with Trade Credits and Discounts from Suppliers
When you plan on doing transactions with a supplier, you have to establish sales term before. Sales terms are the timeframes and the discounts available where you have to pay the supplier once you are billed, after receiving the goods and services. Rare are businesses that will demand immediate payments, unless they deal with a young company that still has to gain their trust. It is an interesting alternative to banks when you seek financing.
Sales terms are presented in the following format: "2% / 10 days net 30". In this example, you have a discount of 2% if you pay within 10 days, or you pay the full amount before 30 days. If you don't pay after 30 days, you will be in delinquency and may have to pay penalty fees.
Other credit sales terms provide the option of several equal payments. For example, a bill could be divided in three equal payments every 15 days, which involves payments of one third of the bill in 15 days, another third in 30 days and the last third in 45 days.
Each option has its advantages. A company with a cash flow surplus should negotiate sales terms with a high early payment discount, like 3% or 4%, should they reduce the prompt payment discount delays from, let's say, 10 days to 5 days. This method optimises the use of cash flow since you end up paying goods and services at a lower price.
Another company that would be looking for financing should seek longer payment delays, such as net 60 days or more. And companies that possess a high outstanding balance with their supplier and need to decrease it, but do not have the cash surplus, the option of equal payments would be the best one. Several equal payments will help maintain a lower outstanding balance, and at the same time take advantages of credit trade in.
There are sales terms you should adopt for every situation, but the important aspect is to realise the financial state of your company and adopt the right behaviour. Many businesses won't take their prompt payment discount even though they have a positive cash flow, and others will pay quickly but have a high level of indebtedness everywhere else. Cash flow management is indeed an important part of your businesses.