Category: Borrowing - Stu Fleischer: The Common Cents CFO
 
Since interest rates are lower now than they have been historically, cash discounts have become more valuable.  As the following illustration highlights, it even makes sense to borrow funds to take advantage of a cash discount.

In this example, let us assume a company receives a $100,000 invoice with payment terms of "2 - 10, net 30" (i.e. the debtor has the option to take a 2% discount or $2,000 if payment is made within ten days of the invoice date or to pay the full invoice amount within thirty days).  Also, let us assume that the company has no current cash nor will it have the $100,000 until the final invoice due date but it does have a $100,000 bank line of credit with an annual interest rate of 6%.

If the company borrows the $98,000 from the bank on day 10 and repays the loan plus interest on day 30, it will cost $327 in interest.  Hence, the financial professional has saved $1,673.  Imagine how many thousands of dollars could be saved if this borrowing program were extrapolated to an entire year on all eligible purchases.

Even if a supplier does not offer cash discounts, there is reason to aggressively negotiate a discount.  With cash being tight these days, you can tempt a vendor into giving a cash discount by promising to pay immediately for a new purchase.  Should the supplier refuse the offer, it is neither illegal nor unethical to stress the fact that the vendor will absolutely never get paid until the due date.