Improve your Business Financing with Trade Credits and Discounts from Suppliers
As a business, when you plan on doing transactions with a supplier, you have to establish the sales terms before. Sales terms are the timeframes (with applicable discounts if available) where you have to pay the supplier, once billed, after receiving the goods and services. Rare are the businesses that will demand an immediate payment, unless they are dealing with a young company that still has to gain their trust. It can be an interesting alternative to banks when seeking 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 will have to pay the full amount before 30 days. If you don't pay after the 30 days, you will then 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 into three equal payments every 15 days, involving 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 will end up paying goods and services at a lower price.
A company that is looking for financing should seek longer payment delays, such as net 60 days or more. Companies that possess a high outstanding balance with their supplier, who need to decrease their balance but do not have the cash surplus, should aim for the option of equal payments. Dividing the bill into equal payments will help maintain a lower outstanding balance.
It is important to understand the financial situation of your company in order to pick the right sales terms. Many businesses won't take their prompt payment discount even though they have a positive cash flow, while others will pay quickly but have a high level of indebtedness. Cash flow management is indeed an important part of your business!