Although most business owners complain of cash flow problems, a few companies actually have the opposite “problem”: they have great cash flow and a substantial amount of available cash. In fact, they have more cash than they need to run their day-to-day operations. These companies often either keep their money safely in the bank or invest in government-backed securities to safely earn a little interest. Either way, these two solutions allow a business to “park” their money while waiting for an opportunity to reinvest it in the business – or return it to shareholders.
However, there is a way to use this money to increase your gross profits (net sales – cost of goods sold). The “trick” is simple. Many vendors offer a 2% early payment discount to clients that pay an invoice within 10 days. So, pay early and get the discount! By doing so, you decrease your costs of goods sold, which, in turn, increases your gross profits. And, since getting financing is difficult in the current environment, you may also be able to negotiate an even higher discount from your vendors. When done correctly, this simple strategy can boost your profits.
An equally important benefit of this strategy is that you can also increase your company’s creditworthiness, thereby enabling you (in the future) to possibly get longer net terms and higher credit amounts. This line of thinking is circular – but it works. You pay quickly right now to build credit, so that you get higher and longer payment terms in the future (if you need them). There is one important catch, though.
How to pay quickly and improve your commercial credit profile
Most companies evaluate trade credit by checking reports from companies like Dun and Bradstreet and Experian. However, not every vendor reports its trade information to these companies. While getting an early payment discount definitely impacts your profitability, it will only impact your credit if your vendor reports the information. This point is critical but often overlooked. To use this strategy to improve your credit, follow these steps:
- Get copies of your corporate credit report from major bureaus. Two common ones are DnB and Experian.
- Ask your vendors if they report payment information to the above bureaus.
- Make a list of vendors that do report payment information.
- Try to pay those vendors as early as possible (while getting the discount!).
Although there are no guarantees that this will improve your commercial credit, most people would agree that paying your invoices early on a regular basis should have a positive impact.
One last point
Be sure that you implement this practice only if and when you have sufficient cash reserves to do so. You want to avoid, at all costs, getting into your own working capital problems because you started paying invoices off early. You have to manage your working capital very carefully.