What Happens When You Pay Your Suppliers Early?
Cash flow is the lifeblood of not just your ecommerce business, but any small business. After all, having access to working capital allows you to more efficiently run and grow your business. Long payment terms can easily hinder your growth and many of your suppliers are in the same boat. While you may not have thought of it that way before, cash flow is equally important to your suppliers (many of which are small businesses too), which is why many of them offer early payment discounts and other benefits.
At the end of the day, when you have better cash flow and can help your suppliers get better cash flow too, you open the door to a lot of opportunities for growth. Let’s take a look.
How Early Payments Work
It’s not uncommon to see vendors of all kinds offering early payment discounts on their invoices. The actual discount amount depends on a number of variables, including industry standard, competitor discounts, and client repayment history. In general, the discounts are 1%-2% off the total invoice amount if paid within 10-15 days of a Net 30 invoice. While this may seem like a small discount, it can add up to significant savings over time — especially if you work with multiple vendors/suppliers that offer early payment discounts.
If you don’t see this on the invoice, ask what they can do for you if you pay early. Money talks. So don’t be afraid to use cash flow to your advantage. Don’t just pay early. Ask them to give you a reason to pay early.
Pro Tip: Be sure to ask your supplier if the discount window starts on the date of the invoice or the date that you actually receive it, since these might not be the same day. In many cases, a supplier will assume the invoice date while the customer will assume the date of receipt, so clarify from the start to avoid confusion.
Early Payment Benefits for You
As a seller, paying your suppliers early comes with a host of benefits:
- Save Money & Increase Margins: This is obvious — you’ll save money on your inventory purchases, which means lower expenses, higher margins and faster growth.
- Build Business Credit: Ask your supplier if they report repayment to the credit bureaus. If they do, then your early payments will be recorded, allowing you to build a positive business credit profile. Future suppliers, vendors, even lenders can access this information and see that you are a trustworthy business.
- Develop Strong Working Relationships: You’ll prove to your suppliers that you are a reliable customer — one they’ll want to continue working with. Not only that, they may even cut you other deals in the future, which leads us to our next bullet. If you are trying to get approved by a certain supplier, be sure to tell them that you can pay in full upfront. As that’s sure to open doors. Plus, if your supplier knows you for paying early, they are sure to take your call and do you big favors should you need last minute inventory fast.
- Other Deals: If you consistently pay early and are able to build a solid relationship with your suppliers, they might be willing to offer other benefits like faster production times, fast and/or free shipping, lower unit cost, etc.
Pro Tip: Whatever the discount terms are in your case, make sure to get them in writing. Written agreements will reduce risk for both you and your supplier.
Disadvantages of Paying Suppliers Early
As enticing as these advantages are, let’s look at some disadvantages of paying suppliers early.
- Opportunity cost of capital: If the discount you’re getting from your supplier is less than your typical return on investment in that same time period, then the discount isn’t worth it.
- Risk running low on cash: If you’re in a tight cash flow scenario, then it is not worth the discount to pay your supplier early. You never want to run too low on cash that you have to pay late fees on other charges, not make payroll and worst case, cease operations.
- You don’t actually receive your inventory: If you do not have a trustworthy relationship with this supplier (you have not made several reliable purchases without issue), then you’re putting your cash at risk.
Early Payment Benefits for Your Supplier
It’s not all that common for e-commerce merchants to pay suppliers early because they themselves are strapped for cash. This means your suppliers might be more open to offering an early payment discount, just don’t be surprised if there isn’t an actual policy in place yet.
As you’re negotiating the terms with them, be sure to emphasize the benefits they will reap from getting paid early:
- Better Cash Flow: Suppliers experience cash flow gaps, too. After all, they have to wait 30 or more days to get paid on a job. If you can shorten this lag time, you’ll help them increase their cash flow and working capital so they can stay on top of their operating expenses while they’re also fulfilling orders.
- Less Risk: This may seem obvious, but getting paid early reduces the risk of getting paid late. Think about it. If a customer sees that they have 30 days to pay an invoice, they might wait until the last minute to actually pay, which could then lead to a late payment and, for the supplier, even longer cash flow gaps.
- Customer Retention: Suppliers want repeat business. You’ll be more likely to buy from them in the future (maybe even recommend them to other sellers) if they offer benefits like early payment discounts.
How to Actually Pay Early
To pay suppliers or other vendors early, you need to close your own cash flow gaps and increase your working capital. If you already have working capital, great. Start putting it to work right away. If not, there are tools you can use to help increase your cash flow. Credit cards and bank loans can help immensely, but they only go so far. So for many eCommerce sellers, increasing cash flow in a scalable way means getting financing from companies like Payability. Our goal is to give you better control over the money you’ve earned. When you control your cash flow, you have a stronger hold on your business growth as a whole. Knowledge also gives you power over your business. Check out our blog post to find out how Amazon pays you and what to do in the event of an Account Level Reserve.
Payability’s solutions are designed to fix the cash flow gaps you experience as a marketplace seller, so whether you need a large lump sum of cash to pay your suppliers up front (Payability Instant Advance), want daily payments so you can cover your regular operating expenses (Payability Instant Access), or are looking to access your marketplace income on weekends and holidays (Payability Seller Card), we can help.
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