Supplier terms, early-pay discounts and what they are worth

Contractors spend a lot of energy on getting paid faster and almost none on the other side of the ledger. That is a mistake, because supplier terms are the cheapest credit available to you and early-pay discounts are worth far more than they look.

What 2/10 net 30 is actually worth

The standard offer: 2% off if you pay within 10 days, otherwise the full amount at 30.

Two percent sounds small. Look at what you are being paid for the timing.

By paying on day 10 instead of day 30, you give up the use of your money for 20 days and receive 2% for doing it. There are roughly 18 such 20-day periods in a year, so the effective annualised return is somewhere around 36%.

Nothing else available to you returns that. If you have the cash, or can draw on a facility costing anything remotely normal, taking the discount is one of the highest-return decisions in the business — and it is available every month, on every invoice.

When not to take it

The arithmetic assumes you have the cash without straining. Two situations where it does not hold:

Cash is genuinely tight. Paying early to save 2% and then missing payroll or a tax payment is a bad trade. Liquidity has a value that does not appear in the percentage.

You would borrow at a higher rate to do it. Rare — few facilities cost anything close to 36% — but worth checking rather than assuming.

Otherwise, take it.

The other side: terms are free financing

Net 30 from a supplier means 30 days of material financed at no cost. That is the cheapest money in your business, and it is worth using deliberately.

The mistake is treating "no cost" as a reason to pay as late as possible. Two reasons it backfires.

You forfeit the discount, which as above is expensive.

You spend your standing with the supplier. Terms and credit limits are relationship-based. A contractor who pays reliably gets larger limits, better pricing and, when a job needs material tomorrow, gets it released. One who is chronically late gets the opposite, and finds out at the worst moment.

Late payment is not free. It is paid for in flexibility you need later.

Why this needs a payables report

None of this is actionable without knowing what you owe and when.

Most contractor books track receivables to some degree and ignore payables entirely, because the supplier will chase you and the customer will not. The result is paying whatever arrives on the desk, in no particular order, usually late out of caution.

What you need monthly:

• What is outstanding, by supplier
• When each is due, and whether a discount date is coming
• What is already overdue

With that in front of you the decision becomes obvious. Without it, you are paying by instinct and forfeiting discounts you did not know you had.

Combine it with a cash flow forecast and you can see, this week, whether taking a discount leaves you comfortable through payroll.

Negotiating terms

Worth asking, and rarely asked.

Ask for terms if you are on cash. Suppliers extend credit to contractors who pay reliably. If you have twelve months of clean history, ask.

Ask for a longer window as volume grows. Net 45 instead of net 30 on a growing account is a normal conversation.

Consolidate. Spreading spend across four suppliers gives you leverage with none of them. Concentrating it usually improves both pricing and terms.

Ask about early-pay discounts if none are offered. Many suppliers will do it and simply do not advertise it.

Related

• A cash flow forecast you will actually keep up
• Getting a line of credit as a contractor
• The eight numbers a contractor should look at every month