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Of course you should ask (and take) discounts – ten bucks is ten bucks!

This is the second of two posts about discounts.  You can find the first one, which says “don’t offer them”, here.

Ten bucks is a lot more than ten bucks if you can get your suppliers to agree to a prompt payment discount.  These are often described as “2/10 net 30” (“two ten net thirty”), where the customer can claim a 2% discount for paying within 10 days, but otherwise has to pay within 30 days.

This is a bloody good deal when you work through the math:

  • The actual payment price is 98% of retail;
  • The 2% discount gives an absolute interest rate of 2%/98%, or 2.041%;
  • But that rate is for 20 days of a 365 day year, i.e. annualised it’s 2.041% * 365/20, or 37.245%.

In contrast, most businesses can get a working capital loan for under 8% per year.  Borrow at 8% for a return of 37%.  Ten bucks really IS ten bucks!

Profit Breakthrough:

Ask for prompt payment discounts, and grab them with both hands where offered.  If you can’t fund them from free cash flow, grab your Business Advisor and go to your bank for funding to take advantage of your suppliers’ generosity.

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