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Taking Trade Terms

How To Keep Cash Flowing By Setting A Plan With Your Vendors Cash flow concerns can be an issue in even the best economic conditions, but when the economy is slow, nearly every company feels the pinch of late payments. The problem can be particularly difficult for businesses where expensive equipment and lab

How To Keep Cash Flowing By Setting A Plan With Your Vendors

Cash flow concerns can be an issue in even the best economic conditions, but when the economy is slow, nearly every company feels the pinch of late payments.

The problem can be particularly difficult for businesses where expensive equipment and labor must be paid for before the customer provides full payment. This situation leaves you financing the customer’s new alarm system or home theater until you receive full payment, which can take a heavy toll on your cash flow if you’re not efficiently using trade terms and other cash flow management tools.

Many business owners are familiar with trade terms, but whether they are taking full advantage of them is another issue entirely. Some may simply feel trade terms are out of their reach, while others may not understand how helpful they can be in improving cash flow.


Trade terms are known by a number of names and are often referred to as “supplier terms,” “trade credit,” “net terms,” “purchase terms,” “payment terms,” or simply “terms.” The premise behind the practice is simple. A company and its suppliers agree on the timing of payments and how much is due at a given date. Common agreements are “net 30” or “net 60,” meaning that a company must pay its supplier in full either 30 or 60 days from the invoice date. To encourage early payment, however, suppliers may include an incentive of one percent or two percent for customers who pay within 10 days. When your business has cash and can make early payments, earning a onepercent or two-percent discount is a great option that puts your cash to work. While the early-pay discount may seem insubstantial, a consistent discount over a year’s time can add up to considerable savings. In a slow economy when profits are slim, discounts like this are a valuable tool for boosting margins. If your company, for example, is able to mark up video equipment for a profit of 10 percent, then the additional one percent received from your equipment supplier for early payment essentially widens your margin to 11 percent.

There are, of course, times when an early payment isn’t an option. To help customers avoid a cash-flow crunch, some vendors offer trade terms that will permit you to delay payment. Under these terms, customers agree to make a designated partial payment and are permitted to take the goods and defer full payment for a specified term, such as for an additional 30 days.

Whether you’re in a position to earn a discount or need to defer payment, trade terms are a great tool. Unfortunately, many businesses that could take advantage of them don’t.

The first step to gaining better terms is to recognize that not all vendors offer them, and for those who do, they’re not automatic. Companies are selective about who receives trade terms because they don’t want to take the risk of offering a discount to customers who will simply take the discount and then pay late. Likewise, they are cautious when extending deferment options, because doing so amounts to financing free short-term credit for customers.

Because trade terms are offered only in limited situations, receiving this privilege often takes a bit of effort on the part of the customer. Approach your vendors with the goal of negotiating more favorable terms, keeping in mind that it may take time to earn the privilege. Because trade terms are about trust and creditworthiness, you can expect the most from companies with which you have the longest and best relationships. The better your track record overall and the better a company knows your business, the more likely you are to be rewarded with more favorable terms.

In cases where you haven’t been successful in negotiating trade terms, consider ways in which you can make your business more attractive to vendors. In addition to a good credit record and a healthy vendor relationship, other factors can tip the balance in your favor. Consider the things that make your best clients valuable to you, and use that knowledge to make yourself a better customer. The volume of business a customer provides, for example, is a significant factor in a customer relationship.

With this in mind, perhaps you can consolidate your business for a particular type of goods or service with a single vendor. Another factor that affects how vendors see you is the regularity of your business. Look at your ordering patterns and decide whether you might formalize a standing order with a particular vendor instead of sending orders on an irregular basis.

There will always be vendors who don’t offer trade terms, or situations where you won’t be offered special terms. Furthermore, there are simply many kinds of expenses, such as gasoline, utilities, and phone bills that will never qualify. In these cases, look for other ways that you can improve cash flow. Using charge and credit cards that offer cash back or other rewards is one way of earning a form of discount. Another possibility is to use cards that offer trade-like terms. Also consider other non-cash payment methods, such as bartering and using rewards from credit and charge cards. While seemingly modest, all of these techniques can go a long way.

Whether you already receive trade terms or hope to qualify in the future, it is important to establish— and maintain—a strong credit record. Doing so will help you keep the terms you may already have, and can help you earn more favorable terms later.

If you’ve worked hard to build a strong credit record, then don’t keep it to yourself. Make it easy for vendors and credit issuers to confirm that you’re an established business. You can do so by registering with commercial credit bureaus like Dun & Bradstreet and the Small Business Financial Exchange.

You’ll also want to make certain that the credit records on file are up to date and accurate. Contact credit bureaus to verify the information in your credit report and check your company profile for errors. If you do find mistakes or irregularities, be sure to address them immediately to maintain good standing.

A slow economy can really test a business, but it may help to simply consider this slow period as training for better times to come. By developing the skills to make it through tough times, such as the proper use of trade terms, you will have created a business that will be ready to take on the opportunities that a strong economy will provide when the economy does eventually rebound.

Richard Flynn is senior vice president and general manager for American Express OPEN, the nation’s leading issuer of card products for small business owners.