Boost Cash Flow with Trade Terms

Feb. 9, 2010
For businesses struggling with cash-flow problems in a down economy, trade terms can be a valuable tool. The author explains the basics of trade terms and also gives advice about alternatives if using the trade terms technique is not an option.

While the economy may wax and wane, the desire for new technology never truly does. Consumers and businesses alike may not have the resources they once had to invest in electronics, but the desire for newer and better electronic devices and equipment is still there. To feed this desire and prepare for times when the market is again full of willing buyers, the electronics industry continues its pursuit of faster, smaller and better.

But while the race is on among competitors in the electronics design world, winning the race isn’t just about innovation. It’s also about solid business practices. Innovation must be supported by the solid foundation of a well-run business, or there will be no cashing in on new technology, no matter how revolutionary. A threat to this foundation, the slow economy has caused the industry to feel the effects of poor cash flow, with nearly every business feeling the pinch of slower-paying customers and less cash on hand to meet obligations.

To combat these cash flow issues, small businesses can turn to classic cash flow management techniques such as trade terms. Many small business owners are familiar with trade terms, but whether they are taking full advantage of them is another issue entirely. In fact, while a great number already profit from trade terms, at least as many fail to do so. Some business owners may feel trade terms are out of their reach, while others may not understand how helpful they can be in improving cash flow. To help you make the most of trade terms, the following provides the basics of how trade terms work and how they can help even out cash flow. In addition, you’ll also find tips to help you tap this resource or find alternatives if trade terms aren’t currently an option.


Trade terms are known by a number of names and are often referred to as “supplier terms,” “trade credit,” “net terms,” “purchase terms,” “payment terms,” or simply “terms.” The premise behind the practice is simple. A company and its suppliers agree on the timing of payments and how much is due at a given date. Common agreements are “net 30” or “net 60,” meaning that a company must pay its supplier in full either 30 or 60 days from the invoice date. To encourage early payment, however, suppliers may include an incentive of 1% or 2% for customers who pay within 10 days.

When your business has cash and can make early payments, earning a 1% or 2% discount is a great option that puts your cash to work. While the early-pay discount may seem insubstantial, a consistent discount over a year’s time can add up to considerable savings. In a slow economy when profits are slim, discounts like this are a valuable tool for boosting margins. If you’re able to mark up a component used in your product by 10%, for example, then the additional 1% received from a supplier for early payment essentially widens your margin to 11%.

There are, of course, times when early payment isn’t an option. To help customers avoid a cash-flow crunch, some vendors offer trade terms that will permit you to delay payment. Under these terms, customers agree to make a designated partial payment and are permitted to defer full payment for a specified term, such as for an additional 30 days.


Whether you’re in a position to earn a discount or need to defer payment, trade terms are a great tool. Unfortunately, many businesses that could take advantage of them don’t. The good news, however, is that you can take steps to earn this option for your own business. The first step to gaining better terms is to recognize that not all vendors offer them, and for those who do, they’re not automatic.

Companies are selective about who receives trade terms because they don’t want to take the risk of offering a discount to customers who will simply take the discount and then pay late. Likewise, they are cautious when extending deferment options, because doing so amounts to financing free short-term credit for customers.

Since trade terms are offered only in limited situations, receiving this privilege often requires the customer to make the first move. Approach your vendors with the goal of negotiating more favorable terms, keeping in mind that it may take time to earn the privilege. Because trade terms are about trust and creditworthiness, you can expect the most from companies with which you have the longest and best relationships. The better your track record overall and the better a company knows your business, the more likely you are to be rewarded with more favorable terms.


In cases where you haven’t been successful in negotiating trade terms, consider ways in which you can make your business more attractive to vendors. In addition to a good credit record and a healthy vendor relationship, other factors can tip the balance in your favor. Consider the things that make your best clients valuable to you, and use that knowledge to make yourself a better customer.

The volume of business a customer provides, for example, is a significant factor in a customer relationship. With this in mind, perhaps you can consolidate your business for a particular type of goods or service with a single vendor. Another factor that affects how vendors see you is the regularity of your business. Look at your ordering patterns and decide whether you might formalize a standing order with a particular vendor instead of sending orders on an irregular basis.

There will always be vendors who don’t offer trade terms, or situations where you won’t be offered special terms. Furthermore, there are simply many kinds of expenses that will never qualify, such as the many routine expenses of operating a business, including utilities and phone bills. In these cases, look for other ways that you can improve cash flow by delaying payments while still meeting your financial obligations. Also look for alternative ways of earning discounts wherever possible.

Using charge and credit cards is one way to delay payment while still making sure suppliers are paid in a timely manner. Some also present the possibility of earning a type of discount in the form of cash back or other rewards. Another alternative that can improve cash flow is to use cards that offer trade-like terms such as the Plum Card from American Express OPEN. By offering trade-like terms on nearly all purchases, the Plum Card’s terms have provided more than $80 million in savings since the beginning of the recession to small businesses that use the card.

One other method to improve cash flow is to find cash-free alternative payment methods beyond simply using credit or charge cards. For example, consider bartering if it is at all a possibility. Also, if you’re using credit and charge cards, make sure you’re actually using the rewards you earn to your best advantage. While seemingly modest, all of these techniques can go a long way when cash is tight.


Whether you already receive trade terms or hope to qualify in the future, it is important to establish—and keep—a strong credit record. Doing so will help you keep the terms you may already have and can help you earn more favorable terms later. If you’ve worked hard to build a strong credit record, then don’t keep it to yourself. Make it easy for vendors and credit issuers to confirm that you’re an established business. You can do so by registering with commercial credit bureaus like Dun & Bradstreet and the Small Business Financial Exchange.

You’ll also want to make certain that the credit records on file are up to date and accurate. Contact credit bureaus to verify the information in your credit report and check your company profile for errors. If you do find mistakes or irregularities, be sure to address them immediately to maintain good standing.

Down economy or not, strong technological innovations will eventually find buyers, but only if your business remains resilient enough to weather the economy. So look at better cash flow management not only as an essential step to facing the economy, but as a way of improving your situation when the economy does return. Because the better you become now at managing cash flow, the better positioned you will be to take advantage of all the opportunities that an economic rebound will eventually provide.


An ounce of prevention is worth a pound of cure when it comes to cash flow problems, so get serious about minimizing your business’s fixed expenses. A company should be big enough to cover only its most predictable, recurring needs.  Find creative ways of handling peaks in demand without incurring unnecessary expenses. Hire only the labor you truly need, and make careful decisions about expenses—particularly recurring expenses. If you’re considering a new space in which to do business, whether simply a larger office or a larger retail space, think twice before committing to higher rent. If you feel you absolutely need to move to a larger and more costly space, consider the option of sharing a portion of the space with another small business in a related field.

When making purchases for your business, also look for non-cash ways to get what you need. Credit-card rewards programs can be effective cash substitutes, and bartering with other businesses for services may be an option.

Efficiently managing accounts receivable also plays a critical role in maintaining healthy cash flow.  To ease the accounts receivable process, make sure what you’re owed arrives on time by setting clear payment terms and expectations. It’s important to be diligent on follow-up and critical to stay on top of collections. Simply knowing when you can expect payment is half the battle.


Despite the best of plans and most diligent cash management, there may be times when your company needs extra cash, so it’s important to have tools on hand for when cash is scarce. You should make sure your company is prepared with several sources of financing in advance.

One of the reasons it pays to plan ahead is that some financial institutions may be more likely to extend lines of credit or loans when your company is in good financial health and less likely when cash flow problems have already taken a toll on your finances. When seeking financing, be careful not to overlook special lending programs for which your business may qualify, such as those designed to assist small businesses owned by women or minorities.

Once you have credit available to you, use it wisely. Short-term financing options such as lines of credit, short-term loans, or credit cards are best used for short-term cash needs. Likewise, long-term or secured loans should be used for the purchase of long-term investments.


Consistent growth is the best way to smooth out bumps in cash flow. When growth opportunities arise, plan carefully with an eye on cash flow projections. Make a conscious decision about how much you have to spend to reach your goal and how long it will be before you pay back the debt.

Every investment, whether in labor, supplies, or equipment, should have a clear return. Make sure each will earn a profit, but also look at how long it will take to collect that profit. Likewise, if you look at each customer as an investment with a scheduled return, you’ll not only improve cash flow, but also profitability.

Entrepreneurs go into business because they thrive on the excitement of a good challenge, but even the most daring entrepreneur can do without the stomach-churning, rollercoaster ride of variable cash flow. And rid yourself of these avoidable bad times by keeping an eye on cash flow.

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