More important question to consider with your billing is should you offer any payment discounts.  For example, should you offer a term like 2% 10, net 30?

On the one hand, the view can be that it could be expensive financing.  For example, if you’re paying 2% to collect something 20 days sooner, you’re, in essence, technically paying 36% interest on that money.  At face value, it might not appear to be such a good deal.

However, other factors can come into play.  One could be the credit risk.  Perhaps, by offering the payment discount, you get your money sooner and therefore you cut your credit risk exposure.  Know how much you would have to sell in order to make up for one lost account.  That could lead to helping you assess the value gained from a payment discount.

It could add to your borrowing capacity effectively or it could save you from more expensive equity capital.  Thirty-six percent can seem expensive as an effective rate, however if the only game in town is going for equity financing then this trade receivable financing could be a bargain.  It might be cheaper than equity capital in the long run and it could certainly increase your cash flow capability and capacity and eliminate some need for the other sources of capital as you’re company keeps growing.

Another thing to consider is the industry norm.  If it’s normal for the industry to offer it, than you may very well have to offer it yourself in order to be competitive.  Conversely, if nobody is offering it, would this allow you to pick up some additional business that you might not be able to get otherwise?  If that’s the case, the 2% could be a real bargain. 

You might be able to lock out the competition and you might also to be able to make it tougher for them to adapt to if you’ve got enough mass of transactions in this area.

So give the payment discount some strong consideration.  It might be expensive financing, but it could be inexpensive compared to other alternatives and it could increase your borrowing base capacity versus what you’d have if you did nothing.

Jon Paul, MBA, CPA, CMC, CM&AA

President, Value Added Finance Resources
Bringing new insights on results and maximizing company value