Trade Terms Can Help Alleviate Your Cash-Flow Concerns

In a down economy, cash flow is one of the most predictable concerns for nearly every small business owner. Small businesses can significantly ease these worries by understanding how trade terms work and what the alternatives are when special terms aren’t available to them. Trade terms—also known as terms, supplier terms, trade credit, net terms, purchase terms, and payment terms—are an agreement between a business and its vendor that establish how and when the business must pay debts.

Under trade terms, businesses can often receive a discount of 1% or 2% for early payment, such as within 10 days. Businesses also generally have the option to pay a specified percentage and delay payment in full for a specified period, such as an additional 30 days beyond the initial due date. While a 1% to 2% discount or 30 day deferred payment may not seem significant, the savings and alleviation of cash flow problems can be substantial over time.

To even out cash flow through trade terms, small businesses can take these steps:

1. Actively pursue favorable terms. Approach vendors to negotiate trade terms. Though some vendors may not have offered them to you, they may be willing to negotiate. Expect the greatest success from those with whom you have the longest and best relationships.

2. Create opportunity. If you can’t secure trade terms, consider consolidating your business with a single vendor when possible. If your business represents significant volume for a vendor, you are more likely to be rewarded with trade terms. You may also want to formalize a standing order instead of sending orders irregularly. Consistent business is also often rewarded.

3. Keep credit records in order. Trade terms are considered short-term credit and represent a financial risk to the vendors that extend them; therefore, the better your credit rating, the better your chances of negotiating favorable terms.

4. Seek alternatives. When trade terms aren’t available, look for other ways to improve cash flow, such as charge and credit cards, which will allow you to delay payment when cash is tight. Also consider other noncash payment methods, such as bartering and rewards programs from credit and charge cards.

Richard Flynn Senior Vice-President and General Manager American Express OPEN New York

Before it's here, it's on the Bloomberg Terminal.