Rules
Part of How to open vendor accounts without giving away free information
Vendor accounts: working out what the float and the discount are worth
Vendor accounts arithmetic, computed here on invented figures: this page has no calculator. What the float is worth, and what declining a discount costs.
This page does not calculate anything. There is no form here, nothing to type into, and no result returned. Every figure below is invented so that the method is visible, and none of it describes any supplier's real terms.
What the page gives you instead is the arithmetic, done once on placeholder numbers, so you can redo it on your own.
What to take away
- Trade terms are financing, and the interesting question is what they cost or save compared with the alternatives.
- Declining an early-payment discount is usually the most expensive ordinary decision a small business makes, and it looks free.
- Two calculations cover nearly everythingwhat the float is worth, and what the discount is worth annualized.
Calculation one: what the float is worth
Net-30 means the supplier finances your purchase for about a month. The amount
Float value on invented figures
- 8,877average supplier financing, net-30
- 13,315average supplier financing, net-45
- 1.5%invented monthly facility rate
- 1,598annual cost of carrying 8,877
of financing you are getting at any moment is roughly your daily purchasing multiplied by the number of days you have.
On invented figures: a business buying 9,000 a month on net-30 has, on average, about 8,877 of supplier financing outstanding at any given time. The same business on net-45 has about 13,315 outstanding.
That is money it does not have to hold, borrow or raise. Priced against a facility, the saving is whatever that facility would have charged. On an invented rate of 1.5 percent a month, carrying 8,877 elsewhere would cost about 1,598 a year, so the terms are worth roughly that much before anything else is considered.
Substituting your own monthly purchasing and your own alternative cost takes two minutes and gives you a real number instead of an impression.
Calculation two: what a discount is worth
An offer of the form "small percentage off if you pay early, otherwise the full
Annualizing a discount offer
- Divide discount by one minus discount
- Count days from early to due date
- Divide 365 by those days
- Multiply step one by step three
amount at the normal date" is a choice between paying less now and keeping cash longer. It is priced as a rate, and the rate is usually large.
The method:
What a discount is worth
- Take the discount percentage, and divide it by one minus that percentage. That is what you pay to keep the money.
- Count the days between the early date and the normal due date.
- Divide 365 by that number of days. That is how many times a year the choice comes round.
- Multiply step one by step three.
On invented terms of two percent off if paid by day ten, otherwise due on day thirty, there are about 18.3 twenty-day windows in a year, and the annualized cost of declining works out at about 37.2 percent simple, or about 44.6 percent if you compound it.
Two more invented cases for comparison. One percent by day ten, net thirty, comes out near 18.4 percent simple. Two percent by day fifteen, net forty-five, comes out near 24.8 percent simple, because the window is longer.
A single invoice makes it concrete: an invented invoice of 4,200 with a two percent discount saves 84 for paying twenty days sooner. Small in isolation, and repeated across a year of purchasing it is not small at all.
Putting the two together
The two calculations pull in opposite directions and that is the point. The float is worth something. The discount is usually worth more.
So the decision rule is not "always take terms" or "always take discounts". It is: take the discount when you can fund it and its annualized cost exceeds what that money does for you elsewhere; take the float when you cannot, or when cash timing genuinely matters more that month.
Where the money would otherwise come from is the comparison that settles it, and the options are laid out in secured business credit cost and in credit cards cost.
What the arithmetic cannot tell you
None of this says whether the supplier will report the account anywhere, which is a separate question with a separate answer, covered in vendor accounts.
It also cannot price the relationship. A supplier who has extended terms for years through a bad quarter is worth something that does not appear in any of these figures.
And it cannot tell you your own cost of money, which is the input that decides everything above. That comes from your own facilities and your own bank, not from a page.
For a neutral outline of the funding options you are comparing terms against, the SBA's guidance on funding your business and its material on managing business finances both cover the ground without selling anything. The wider groundwork sits in credit foundations.
Common questions
Why is there no calculator on the page?
Because the inputs that matter are your purchasing volume, your supplier's exact terms and your own cost of money, and a form that asked for all three would still be doing arithmetic you can do faster in a spreadsheet. The method above transfers; a widget's output would not.
Are the percentages here real?
No. Every number on this page is invented to demonstrate the calculation. Run it on the terms in front of you.
Should I always take the early-payment discount?
Not always, but the burden of proof sits with declining it. Work out the annualized cost first, then decide whether the cash timing is worth that much that month.
