Borrowing to pay suppliers early for discounts

How early-payment discounts work

A term like 2/10 net 30 means you take 2 percent off if you pay within 10 days, otherwise the full amount is due in 30.

Suppliers offer these discounts to get cash faster. If you ignore them, you are effectively borrowing from the supplier at a price. On a $20,000 invoice, 2/10 net 30 saves $400 if you pay by day 10. The cost of not paying early is that same $400 for holding $19,600 for just 20 more days.

Annualized, that is a high rate, roughly 37 percent, because you are paying 2.04 percent of the amount for only 20 days. The simplified formula is (discount divided by 100 minus discount) times (365 divided by days of extra credit). For 2 percent over 20 days, that is 0.0204 times 18.25, about 37 percent.

The break-even test

Borrow only if the discount is larger than the total cost of the funding for the days you need it.

Illustrative example: a bakery owner buys $25,000 of ingredients monthly on 2/10 net 30. Paying early saves $500 each cycle. To pay on day 10, the owner needs $24,500 for 20 days. A short-term product that costs 1.5 percent for that period would cost about $368, leaving about $132 in savings. A product that costs 3 percent costs $735 and loses money.

The decision depends on price. Before you borrow, get the total payback figure in dollars and compare it to the discount in dollars. Our post on the total cost of an offer shows how to calculate that.

Better options than borrowing every time

A line of credit is usually the best tool for repeated early payments because you draw and repay quickly, paying interest only for the days used.

• Business line of credit: draw on day 8, repay on day 30 when you would have paid anyway. You pay interest on only 22 days.
• Working capital: for a larger one-time discount, such as a volume purchase. Check the total payback carefully since short terms can carry a high effective cost.
• Term loans: not usually a fit for a 20-day gap.

If you will use the discounts every month, a line of credit also avoids reapplying each time. See inventory funding payback math for related calculations.

Who benefits the most

Businesses with thin cash but strong margins on goods they buy repeatedly: distributors, restaurants, contractors, retailers.

The benefit grows with the size and frequency of purchases. A contractor who buys $60,000 of materials per month on 2/10 net 30 can save $1,200 a month. That is $14,400 a year, which can exceed the cost of a line of credit sized to cover the early payment.

It is less useful when the discount is small, such as 1 percent on net 60, or when the supplier is your only source and may change terms. It also fails when you will not be able to repay the draw on schedule. Do not trade a small discount for a late-payment fee.

Hidden traps

Check the fine print on discount terms, repayment timing and how the funding is debited from your account.

• Some suppliers only allow the discount if payment is received, not sent, by the deadline.
• Daily or weekly debits can reduce your cash faster than expected, undermining the benefit.
• A factor-rate product repays a fixed multiple even if paid early.
• Late payments can cancel the discount and trigger finance charges.

Convert any daily or weekly payment to a monthly equivalent so you know your real obligation. See daily vs weekly vs monthly payments.

Negotiating terms without borrowing

Sometimes a better deal comes from asking, not financing.

If cash is tight but you pay on time, ask your supplier for better terms. Consistent payers can often negotiate longer net terms, a discount for ordering in larger batches, or a standing early-pay arrangement. Offer to consolidate orders with one vendor in return for improved pricing. Compare suppliers too, since a competitor may offer equal prices with more flexible terms.

Track the benefit over a year. A 2 percent discount on $300,000 of annual purchases is $6,000. Confirm that you can capture it reliably, and verify that the supplier does not raise base prices to offset the discount. If the discount is genuine and repeatable, a standing line of credit is the cleanest way to capture it.

Applying with ROI Funder

ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue, from $5,000 to $5,000,000.

A complete file is the application plus 3 months of business bank statements. Applying is online, takes a few minutes and uses a soft credit pull. There is no obligation to accept an offer. Lines of credit typically take 24 to 72 hours, so set one up before you need it rather than the day an invoice arrives.