How much does it really cost you when you don’t take advantage of vendor discounts? Many suppliers will offer a 2% discount for prompt payment (payment within 10 days is typical). While it may seem like a small amount, especially if you’re paying a lot of small invoices, it really adds up.
For example, let’s say you have a $100 invoice to a vendor that offers a 2% discount if you pay within 10 days. It may seem insignificant to think you’ll only save $2 and why not just hold onto the $100 until your regular payment terms of 30 days, right? Well, if you think about it in terms of paying interest on the $98, then it’s costing you $2 to keep your money for an additional 20 days. This equates to an annual interest rate of nearly 37%!!
Here’s the math: Let’s say you go to the bank and borrow $98. If you pay it back in 20 days, you’ll have to pay $100. This means you’re paying $2 for every 20-day period you keep the money. If you held onto the $98 loan for a full year, you’d be paying $36.50 in one year for borrowing $98.
365 days in a year, divided by 20 days for each period, equals 18.25 periods
$2 multiplied by 18.25 periods equals $36.50
$36.50 divided by $98, equals 37% annual interest rate
Wow – that’s expensive! If you’re not taking advantage of vendor discounts, you may want to consider starting!