Vendor terms: the cheapest financing you're not asking for

Small businesses spend enormous effort chasing customers to pay faster and almost none negotiating to pay their own suppliers slower. Both move the same amount of cash. One requires changing someone else's behaviour; the other takes an email.

Every day you hold onto a supplier's money is a day you are financed for free. Stretched across all your payables, that is usually the cheapest working capital available to you — and unlike a line of credit, nobody charges interest or asks for a personal guarantee.

What thirty days is actually worth

The arithmetic is simple. Take your annual purchases from a supplier, divide by 365, and multiply by the days you gain. That is cash that stays in your account permanently — not once, but as a standing balance for as long as the relationship lasts.

Nearly $50,000, permanently, from three conversations. Compare that to what it would take to generate the same cash by growing revenue: at a 35% contribution margin you would need to sell almost $140,000 more.

When paying early is the better deal

Sometimes the opposite is true, and the numbers are startling. A supplier offering 2/10 net 30 — 2% off if you pay within ten days instead of thirty — is offering you 2% to give up twenty days of cash.

Annualised, that is roughly 36%. There is almost no circumstance where holding cash for twenty days is worth 36% a year. If you have the liquidity, taking that discount is one of the highest-return uses of money available to a small business — better than paying down most debt.

So the rule is not "always pay late." It is: take every early-payment discount you can fund, and stretch every supplier who offers none. Most businesses do neither — they pay everyone on the same middling schedule and leave both opportunities on the table.

How to actually ask

Suppliers extend terms constantly. It is a routine commercial request, not a favour, and the ones who say yes are usually the ones you have given a reason to:

• Ask when you are strong. Right after a large order, or at renewal — not when you are already late. Terms requests from a struggling customer get read as a warning sign.
• Trade something. Volume commitment, a longer contract, consolidating spend you currently split across two suppliers. Terms are cheap for them to give and worth a lot to you.
• Ask for a specific number. "Can we move to net 45?" gets an answer. "Can we discuss payment terms?" gets a meeting.
• Then honour them exactly. The entire value of longer terms disappears if you become an unreliable payer. Net 45 paid on day 45, every time, is worth far more than net 30 paid whenever.

The line you should not cross

There is a difference between negotiating terms and simply paying late, and it matters more than it looks. Agreed terms are a commercial arrangement. Unilateral slow payment is you deciding your supplier will finance you whether they like it or not.

The cost shows up eventually, and rarely on an invoice: you stop getting the last unit of stock when supply is tight, your rush orders stop being accommodated, and the price creeps up at renewal. Small businesses run on suppliers who take their calls. That relationship is worth more than thirty days of float.