Merchant Cash Advance for Supplier Discounts

An article by Wayne Jordan    No Comments

There’s a saying in small business that goes: “buy low, sell high, collect early, and pay late”.  Though said tongue-in-cheek, there is an element of truth in the “pay late” part.  Too often, small businesses hold on to their money for as long as possible to avoid cash shortages.  By doing so, they fail to take advantage of supplier discounts.

Wholesale suppliers are aware of the tendency of businesses to delay payment, so they usually offer discounts for early payment.  Suppliers will structure their terms to offer 2%/10 net 30, or perhaps 1%/20 net 30, meaning: a 2% discount on the invoice for paying within 10 days, a 1% discount for paying within 20 days, with the balance due in full within 30 days.  Typically, interest is added to invoice after 30 days.  If an invoice slips into past-due status, the business owner suffers a double loss:  the loss of the discount and the loss of 18%+ interest that is usually charged on past-due supplier invoices. 

The Cash Flow Advantage of Discounts

What would motivate a business to pay an invoice quickly just to take advantage of a 2% discount?  Consider the math:

Let’s say that a business is offered a 2% discount on a $1,000 purchase of tires for their delivery truck.  By taking the discount, the business will pay only $980.  If the discount is not taken, the business will pay an additional $20 just to have an extra $20 for twenty days.  Now, consider this: there are approximately eighteen 20-day periods in a year.  Paying an extra $20 on every $1,000 in invoices every twenty days is roughly equivalent to an annual interest cost of 36%.  Saving 36% interest makes it worth taking the discount, even if the business has to borrow money to do it.

Merchant Cash Advance Provides Funds

For businesses that accept credit card payments, a merchant cash advance (MCA) can provide the funds needed to get “ahead of the curve” in taking supplier discounts.  An MCA is simply an advance on future credit card sales.  Re-payment is made directly from the merchant credit card account.  There is no collateral needed, the funds can be acquired quickly, and the advance is easy to qualify for.  All that a business owner needs to qualify is:

• $2,500 minimum in credit card sales per month
• 4 months as the current business owner
• Have a FICO score of at least 500 (better credit = more funds and lower rates)

There is no fixed repayment term with a Merchant Cash Advance; a pre-determined percentage is deducted from future credit card receipts.  So, when business is good, the payment will go up; when credit card receipts slow down, the payment goes down as well.  An MCA is a cash-flow-friendly solution to taking advantage of supplier discounts.

Use the Funds However You Wish

Of course, a Merchant Cash Advance can be used for any purpose: renovations, inventory, payroll, or other need.  Just remember, when you need funds quickly, a Merchant Cash Advance is your best bet.