Business Advice - Factoring Can Help Cash Flow

Did you know that paying your bills early might actually save you money? Many businesses offer prompt pay discounts, or "2/10, net-30 discounts," which allow companies to subtract two percent (and sometimes more) from an invoice amount if the invoice is paid within 10 days if receipt instead (of the more standard net 30 or net 60 day payment period.)

Prompt payment discounts can be offered in any industry and anywhere along the distribution channel, including between suppliers, distributors, customers, service providers, and more. In some cases, the prompt payment offer is called a "trade rate," which is, essentially, a special rate that is offered periodically based on certain circumstances.

Taking advantage of these early pay discounts can really add up, especially for companies with thin profit margins. The challenge for many companies, however, is managing their cash flow system in a way that enables them to take advantage of these discounts on a regular basis.

Here's what you'll need to do in order to take advantage of early pay discounts:

1. Determine if an early pay discount is available from a vendor. Not all vendors offer this opportunity. If the early pay discount is not offered up front, you may want to suggest it to the vendor.

2. Alert your accountant or payment processor. If you work with an in-house accountant, it may be easier to alert the accountant of the early pay discount. However, if you have an out-of-house accountant, you may need to get in touch with the accountant to let him or her know about your interest in the early pay discount option.

3. Follow up with the payment processor for your company to make sure that the payment has gone out within the 10 day period.

4. Follow up with the vendor to make sure they received the early payment and applied the discount.

Why offer prompt payment discounts?

In addition to being able to take advantage of prompt payment discounts, you may also want to offer your own prompt payment discounts to your business associates. Here are a few ways in which a prompt payment discount could benefit your business:

• Boost short-term sales, as customers or vendors act quickly to take advantage of a prompt payment discount.

• Sell older merchandise or merchandise that is becoming out-of-date.

• Reward special or long-term customers.

• Increase productivity.

• Increase cash flow and efficiency of the accounting department.

To determine whether a trade rate or prompt payment discount is right for your business, you may want to conduct a survey amongst your customers, vendors, distributors, and other key business partners. In this survey, find out if the program would be beneficial to your associates and what terms of such a program would be best.