Taking Trade Discounts

Some suppliers may allow you a trade discount off the total amount of their invoice if you pay within a specified period of time. The amount of the trade discount is typically 1 percent or 2 percent if you make payment within 10 days. Full payment is normally due within 30 days if you don't take advantage of the trade discount. The amount of the discount and the time in which you have to take advantage of the trade discount can vary from business to business. To a large extent, a supplier's trade discount is based on what is common for the supplier's line of business. Don't be surprised if some of your suppliers offer generous trade discounts, while other offer no trade discounts at all.

The supplier's trade discount, if one is offered, will be shown as part of the credit terms on your invoice. Trade discounts are generally listed on an invoice in the following format: "1/10, Net 30" or "2/10, Net 30." "1/10" or "2/10" indicates the amount of the discount offered and the number of days you have to take advantage of the discount. In these examples, a 1 percent or 2 percent discount is being offered if the payment is made within 10 days of the invoice's date.

"Net 30" indicates when the full amount of the invoice (without the discount) is due if the trade discount is not taken. In both examples, the net amount of the invoice is due within 30 days of the invoice's date.

Trade discounts are the only exception to the basic rule of delaying cash outflows always pay your bills on time, but never before they are due. In most cases you are better off to pay the bill early and take advantage of the trade discount.

 
Tip

As a rule, you should always take advantage of trade discounts of 1 percent or more if your suppliers require full payment within 30 days. If your suppliers offer payment terms extending beyond 30 days, it may be more advantageous to skip the trade discount and delay payment until the full amount is due.

In order to decide more preciselywhen to take a trade discount, you must compare what you earn by taking the discount, to what it costs you to borrow money in order to have funds available to make an early payment to a supplier.

 
Example

Frank owns a print shop that prints a wide variety of items (flyers, calendars, catalogs, etc.) for all sorts of different customers. Frank regularly purchases paper and ink from one supplier. This particular supplier offers a 1 percent trade discount if Frank pays the supplier within 10 days of the invoice's date for the paper and ink purchased. If Frank does not pay the invoice within the 10-day period, the full amount of the invoice is due within 30 days. Looking at one invoice in particular, it lists the following information:

 
Invoice date: December 1, 2001
Terms: 1/10 Net 30
Cost of merchandise $4,565.31

For this invoice, Frank can take a discount of $45.65 if he pays the supplier not later than December 11, 2001. Therefore, instead of paying the full amount of the invoice ($4,565.31), Frank can subtract the discount and pay only $4519.66. Of course, if Frank does not take advantage of the trade discount, the full amount of the invoice is due not later than December 31, 2001.

Looking back through his invoices, Frank determined that he has purchased a total of $34,950.23 from this particular supplier throughout the year. Frank has taken advantage of the trade discount on each invoice. Therefore, his total savings for the year have been $349.50 ($34,950.23 x 1%) that's quite a savings!

For more advice on using trade discounts, see: