Your biggest supplier just offered to discount your invoice by 2 percent if you pay your bill in 10 days rather than 30. Should you take the offer?
If you’ve got the cash, the answer is almost certainly yes. That 2-percent discount equates to an annual rate of approximately 37 percent — much more than you would earn by keeping your money in the bank an extra 20 days.
And if you don’t have the cash? Assuming you can borrow the money you need for those 20 days — tapping, say, a bank line of credit — it still makes sense to take the discount. Unless you’re borrowing from the mob, you’re paying far less than 37 percent on your line of credit. “From a financial standpoint, it’s a no-brainer decision,” says CPA John Sauder, a partner with Clifton Gunderson LLP in Peoria, Illinois. Even a discount of 1 percent is a good deal under most circumstances, equal to an 18-percent annualized rate of return.
One of the few times you might not want to pay early, Sauder says, is when you’re buying a piece of equipment that you want to make sure is working properly before you fork over your cash. “You tend to get better service,” he notes, “if you owe the vendor money.” You might also eschew a discount if paying it would leave you at risk for not being able to meet other financial obligations, such as payroll.
If you’ve got the cash, the answer is almost certainly yes. That 2-percent discount equates to an annual rate of approximately 37 percent — much more than you would earn by keeping your money in the bank an extra 20 days.
And if you don’t have the cash? Assuming you can borrow the money you need for those 20 days — tapping, say, a bank line of credit — it still makes sense to take the discount. Unless you’re borrowing from the mob, you’re paying far less than 37 percent on your line of credit. “From a financial standpoint, it’s a no-brainer decision,” says CPA John Sauder, a partner with Clifton Gunderson LLP in Peoria, Illinois. Even a discount of 1 percent is a good deal under most circumstances, equal to an 18-percent annualized rate of return.
One of the few times you might not want to pay early, Sauder says, is when you’re buying a piece of equipment that you want to make sure is working properly before you fork over your cash. “You tend to get better service,” he notes, “if you owe the vendor money.” You might also eschew a discount if paying it would leave you at risk for not being able to meet other financial obligations, such as payroll.
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