Supplier credit and advance payments from customers

With supplier credit, payment for goods or services received is made after a certain period of time.

Supplier credit depends on how business is conducted; that is to say that payment for goods or services received is usually made after a certain period of time ranging from 30 to 90 days. By granting a discount for early payment, the supplier tries to discourage the buyer from requesting this credit.

Supplier credit is actually easy to get, but it is not cost-effective. Entrepreneurs not paying their invoices until after 30 days (instead of 10 days, with a 3% discount) are accepting that they will pay an annual interest of 54%. Supplier credit should therefore be avoided as much as possible, and entrepreneurs should instead take advantage of discounts or rebates. A current account credit facility in all cases would be cheaper.

Another way of generating short-term loan capital is getting customers to pay in advance. Here, the customer is like a creditor, in that they pay part of an invoice amount in advance. Advance payments are used in the capital goods industry (construction of machinery) for large orders. They are not usually compensated, and therefore constitute an advantageous source of financing.

How to calculate annual interest

To calculate annual interest, it is worth knowing the status of your accounts. Here is a formula for calculating annual interest on supplier credit and advance payments from customers.

    Discount rate (as %) x 360 days
Annual interest (as %) = ------------------------------------------------------------------
    Net payment objective - discount period (in days)

Exemple:

Discount rate 3%     3 x 360  
Discount period 10 days Annual interest = ----------- = 54%
Net payment objective 30 days     (30-10)  

Last modification 02.08.2018

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