The Economics of Early Payment

Paying your suppliers early not only keeps your suppliers in business, but can provide double-digit percentage returns on your free cash.

If you are a regular buyer of materials, supplies and services, you may have considered how best to optimise your payment strategy. On the one hand, deferring payment to your suppliers gives you extra working capital to run your business, but on the other hand it can create havok in your supply chain.

It is likely that your suppliers would be prepared to give you a discount if you offer to pay them early. Rather than paying them 30 days or 60 days after invoicing, if you pay them immediately on approval you can stand to gain an additional 2-5% discount.

30% APR? Yes please.

As a CFO or Corporate Treasurer, if you were offered 30% APR, risk-free, would you be able to find some free cash?

A growing number of our clients are finding that an Early Payment Discount Programme provides a fantastic return on investment, with no significant implementation hurdles, no risks, and valuable side benefits too.

A client who spends on average €100,000 monthly with suppliers, allocates a pool of €80,000 to fund early payment of 30-day invoices. Given the issues faced by businesses at present in accessing credit of any form, that client can be pretty confident of a high rate of capital utilisation in their early payment pool. Market intelligence shows that suppliers will offer discounts of up to 2.5% of invoice value to be paid 30 days early. On an €80,000 pool, that’s €2,000 per month, twelve times a year – or a return of €24,000 annually on an investment of €80,000.

That’s good money. But in addition, the client rests easy, knowing that they have provided a valuable, optional line of working capital to their suppliers that wouldn’t otherwise have been available, at a better-than-market rate. This creates stability and predictability in the supply chain, and reduces the market’s dependency on bank-based sources of working capital.