Strong relationships are vital in landing financing. That’s why some small business owners have found luck with a group they already know well—their vendors.
Negotiating with vendors to secure better trade terms isn’t new. But research indicates that owners do so more aggressively when they can’t rely on lines of credit from traditional lenders.
According to semiannual surveys from the National Small Business Association in Washington, between 22% and 29% of business owners relied on vendor credit to meet their capital needs between August 2008 and December 2009. That number hovered at about 18% prior to the credit crunch, according to other surveys published by the advocacy group.
Vendors may be open to modifying contract terms, particularly if they are smaller and more flexible operations. To keep customers happy and paying on time, vendors have grown increasingly willing to extend interest-free pay cycles or provide trade credit, which discounts a promptly paid invoice These arrangements can improve cash flow and infuse a business with capital.
Justin Schaldone, chief financial officer of eFashion Solutions LLC, says his regular lender wasn’t willing to extend credit in early 2009, when the Secaucus, N.J., company needed it for more purchases.
In the past year, eFashion has been paying more of its vendors directly, negotiating terms along the way. While some have extended pay cycles to 60 days, Mr. Schaldone says, others offer discounts reaching 5% to 10% for a prepayment. “If we’re paying sooner to get discounts, we have to be careful because that doesn’t enhance cash flow, but we can generate more profit down the road because our margins will be better,” he explains.
Incentives to pay on time benefit both the business owner and the vendor. “We are put on top of their pile,” says Robert Trow, chief executive of Rocasuba Inc., a cosmetics firm based in Mashpee, Mass., that offers a 1% discount to the retail stores, salons and physicians that buy its products and pay the invoice within 15 days.
Not all are willing to negotiate. Unable to find more favorable discount terms with his vendors, Mark DiPasquale, co-founder of Archimedia Solutions Group LLC, a Danvers, Mass., print and copy management provider for architects and engineers, started using an American Express Co. Plum Card, which allows businesses to pay all their vendors on the card and receive across-the-board terms, including early-pay discounts of about 1.5%.
Mr. DiPasquale says his firm, which relies on the card to finance expensive machinery such as printers, plotters and copiers, is saving approximately $1,000 each month by paying early. “Ultimately, that helps our bottom line,” he says.
But spending may need to be significant to make such cards worthwhile. “If you are a first-timer and don’t know how to negotiate, the financial institution or credit card can be beneficial,” says Michelle Dunn, author of several books concerning credit and collecting money, including The Ultimate Credit and Collections Handbook. “But it may not be worth it based on what the fee for the service is.” The annual fee for the Plum card is $185.
One way to persuade vendors is by giving them more business. According to Alice Bredin, small business advisor to American Express’ OPEN division, which offers small business services, paring down vendors to a select few proves dedication and streamlines business operations. “Don’t put yourself with just one vendor, but if you are spread out among many, it makes sense to consolidate,” Ms. Bredin says.
Business owners can enhance their odds of scoring favorable terms by approaching vendors that already have a history of their payment records. “If you can get a discount, or [terms with] no interest, then you can go back to other vendors, and ask, ‘Can you do that for me?’” says Ms. Dunn.
Not all vendors are willing to take the risk of extending interest-free pay cycles to 60 or 90 days, but vendors are seeing that type of request more frequently. “Five years ago, this [negotiating] was an afterthought; now it’s a full time job,” says Mr. Trow.
As a vendor, Mr. Trow scrutinizes his customers’ credit scores and other metrics before extending such terms. “We look at their payment history with us and with other vendors, the number of years they’ve been in business, and our subjective assessment of whether we think they know what they are doing.”
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