4 Ways to Get Vendor Discounts
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
You don't have to finagle vendors to get discounts. Look for offers that make sense to accept, and find ways to structure deals that reinforce vendor relationships.
1. Claim discounts for paying early.
Your vendors may need their money right away, and they are willing to give you discounts to speed up cash flow. Payment terms may be printed on invoices (or written in contracts) but you can also ask about discounts for early payments made before due dates. To see if it makes sense for your business to pay early, compare the rate of return yielded through the early payment to the interest rate charged on your credit line or your pre-established internal rate of return.
For example, your business receives a $10,000 invoice with 2/10, net 30 terms (meaning that the invoice is due in 30 days but you are eligible to take a 2% discount off the invoice total if you pay within 10 days) so that you could save $200 by paying on day 10 rather than paying the full amount at the end of 30 days. If you have the funds and won't put your business at risk of meeting other obligations, then your company will benefit by paying this invoice early.
The calculations:
Invoice Amount: $10,000
Terms: 2/10, net 30
Payment Options: Pay $9,800 on the 10th day; or pay $10,000 by the 30th day
Potential Dollar Savings: $200 (2% x $10,000 or 0.02 x $10,000)
Annualized Interest Rate: 36% if paid on the 10th vs. paid on the 30th day of the invoice
= 2% x (365 days) / (30 days until invoice due date - 10 days of discount due date)
= 0.02 x 365 / (30-10)
If your vendors accept online payments, then you can make the payment on the latest possible date (in this case, the 10th day) but still meet deadlines and claim the discount.
Your business may be able to claim vendor discounts for early payments — even when you don't have the cash or a bank credit line — if you can pay vendors with a charge card. You might also earn card rewards, such as cash back on qualifying purchases or points toward business travel. Check with vendors or visit card websites to learn which vendors accept card payments.
Make sure that you'll be able to pay the card balance on its due date, though, to avoid interest charges, late fees, and service charges, which can negate cost savings from early-pay discounts. Also, watch out for card limits and plan transactions accordingly.
2. Take discounts offered through affinity relationships.
Qualifying for discounts might be as simple as displaying a membership card or entering a member number online, signing up for a business account, or using a certain type of plastic card to pay for purchases.
Check member-services pages of association websites, where you'll likely find discounts on office supplies along with price breaks on travel and shipping services. Sign up for business accounts that are free or available for a nominal one-time or annual fee if vendors offer special commercial rates. Finally, look for upfront discounts or cash-back offers arranged through partnerships between your card providers and vendors. For example, FedEx and Hertz offer discounts on charges paid with an American Express card.
To claim discounts, read offer details or ask how to get deductions applied to your invoice. Most likely, you will need to give a membership or account number, or use the appropriate card. Ask for rules and restrictions before placing an order so that you won't have to chase discounts later.
3. Increase your volume to qualify for volume-based discounts.
Many vendors have tiered pricing with automatic discounts for volume purchases. Or, they may agree to discounts if your business can guarantee a certain volume or provide price breaks after you reach certain, pre-established volume levels. Ask about volume-based pricing, and consider consolidating purchases to raise quantities with certain vendors to qualify for discounts.
4. Negotiate discounts with vendors.
Talk with vendors about ways that your business can win discounted pricing, if appropriate. Find out about operational changes that could reap discounts: for example, give greater order-to-delivery lead times that allow vendors to avoid paying rush shipping charges, or accept shipments during a vendor's slow season.
Look at invoice costs, not just discounts.
Go for discounts but pay attention to final pricing. Some business buyers get excited about getting 10% discounts but are unable to put their hands on published price lists or have a clear picture of baseline prices. More pitfalls to consider:
- special pricing available through catalogs or password-protected websites for members or contract holders that is higher than pricing available to the general public;
- discounted pricing on products with substandard specifications, soon-to-be discontinued items, or products without industry-standard warranties;
- early-payment discounts that are linked to extended terms (90 days, for example), lowering the financial benefit of discounts.
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