Financial Clarity for Entrepreneurs

More Cash Flow Improvement With Credit Cards

This is a follow-up post to Use A Credit Card For Cash Flow Improvement.

While not as popular as it use to be, some vendors still offer payment terms of 2%-10, net-30 instead of the more “normal” net-30.  2%-10, net-30 means that your invoice is due in 30 days, but if you pay it within 10 days instead, you get to deduct 2% from your payment.  Vendors who offer these terms do so in order to speed up their collections, but they know that most customers will not take advantage of them.

For businesses who have the cash flow to do so, paying in 10 days and deducting 2% from the payment is one of the best returns you can get on your money.  In essence, the vendor is borrowing money from you for 20 days (the difference between 30 days and 10 days) and paying you 2% to do so.  Since there are 18.25 20-day periods in a year, this works out to an annual interest rate of 36.5%.  Try getting that on your money market or CD!

This is a compelling argument to taking advantage of early pay discounts, but most small businesses don’t have the cash flow.  This is when the technique outlined in Use A Credit Card For Cash Flow Improvement can be powerful.  If you haven’t already done so, this would be the time to read that post.

Now a business owner can choose between “paying” a vendor in 75 days, or paying in 55 days and taking 2% off the top.  Either way will definitely improve the cash flow of your business, but I lean toward taking the discount.

And, if you have a vendor that won’t extend terms to you and has you on COD, they’ll often extend the 2% discount to you if their normal terms with other customers are 2%-10, net-30.  All you have to do is ask.

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