The Vendor Early Payment Discount Explained
Ah the ‘early payment discount’.
It sounds attractive enough, right?
- Pay your vendor early.
- Receive a decent discount for doing so.
- End up financially richer until… you run out of cash flow halfway through the month because you paid your invoices too soon.
Unfortunately, taking advantage of early payment discounts isn’t always the best choice for your company.
Most of us run on tight cash flows each month.
However, there might be a solution that puts extra cash in your hand… and doesn’t involve pulling out your hair each month.
In this blog, we’re going to break down the early payment discount and give you an outside-the-box solution to start taking the cash each month.
Let’s jump in.
What is Early Payment Discount?
The early payment discount is well, just that. A discount for paying your invoices early.
Many vendors will offer early payment discounts for the same reason you may not be able to take it: cash flow.
Suppliers want to get paid sooner in order to accelerate their own cash flow.
Early payments also reduce the risk of nonpayment or late payments.
Should you Always Take Advantage of the Vendor Early Payment Discount?
The question isn’t so much, should you take the discount.
Instead, it’s how to take the discount and not negatively impact your cash flow.
Here at U-Nique Accounting, we take a unique approach to the conundrum.
We encourage our clients to explore using their line of credit in order to take advantage of the early payment discount.
An accountant is advising you to use a line of credit when it’s not required?
Only if it makes you more money to do so!
THE SHORT VERSION: If the early payment discount amount is greater than the interest on your line of credit, it is a financially smart decision to use your line of credit to receive the cash discount.
So, How do I Know if I Should use my Line of Credit or not?
It’s funny you should ask!
We made a calculator for that.
You can use our Vendor Early Payment Discount Calculator to help you determine whether or not it makes financial sense to use your line of credit for the discount, or forgo the cash.
Sometimes, it’s just not feasible!
But using this tool is a great, quick way to know if the option makes sense for your business.
An Even Better Idea…?
While the U-Nique Calculator is a great tool if we do say so ourselves, don’t rely on it to give you all the answers you need.
Find a good accountant.
The best thing you can do for your business is to work with an experienced and dedicated business advisor to work out what’s best for your company.
One who knows a thing or two about financial processes and accounting.
Having a smart advisor on your side to work out the calculations for you, manage your cash flow ongoing, and advise you on these types of decisions will single-handedly improve your business for the better.
We’ve seen firsthand the difference it makes.
Don’t know a good advisor?
You can schedule a quick call with us using our easy calendar any time. The first call is free.
We’ll cut straight to the chase, and point you in the right direction if we can’t help.
There is nothing to lose!
Until next time.
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