The problem with most windows of opportunity is that by the time many businesses realize there was one, it’s closed.
We’re entering one now. And some companies will use it to irrevocably separate themselves from their competition. Here’s one way you can take advantage while this particular window is still open.
Many business are being challenged by two economic problems at the moment. Declining revenue and reduced borrowing power. More than ever, cash is king as customers pay later and later.
You can use this to your benefit.
Companies to whom you owe money for services rendered will almost always take a small reduction in their bill in exchange for being paid promptly. Many will take even less if you pay early.
This is a staggering opportunity if you manage it well.
Let’s assume a supplier of yours wants to be paid net 10 days from the date of their invoice but will give you a 2 percent reduction if you pay immediately. In this example, a $100 bill costs you only $98.
That represents an annualized interest rate of twenty-two percent.
In other words, if an item paid for today costs $98, but ten days from now costs $100, you are actually financing a $98 item for ten days through your vendor at a 22% rate of return.
And the greater the reduction in cost you can negotiate, the greater the rate of interest you have effectively been paying all these years.
If you enact this negotiation across the board with all your vendors, you will change the economic foundations of your business and the fundamental view your suppliers have of you. You become a preferred client overnight. They will be extraordinarily hesitant to come back and renegotiate your terms, and any price increase they propose can be countered with a greater reduction in your pricing for immediate payment.
This strategy is always available. But it takes economic conditions like these to provide the opportunity to enact it so comprehensively and effectively. In a few months that opportunity will be gone as companies become more sure footed and their credit begins to return.
The window is now.
All of this requires that you be able to fund the earlier payments to your vendors yourself. Which means strong relationships with your bank. From personal experience I can tell you this: any business owner who sits down with their bank manager - a habit you should establish as a regular practice - and presents this analysis, will be viewed very positively indeed. From a bank's standpoint after all, a dollar saved is more valuable in the short-run than a dollar earned.
Whether that is enough to convince the bank to support you depends on where they think your business is going.
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