Is it cheaper to stretch suppliers or borrow to pay on time?

Trade credit feels free because no one sends a statement for it. Where the supplier offers an early-payment discount, it is not free at all — the discount you give up is the price of the extra days, and because the period is short, the annualised cost is enormous. Where no discount exists and no late charge applies, the money genuinely is free, and borrowing to replace it is a straightforward waste.

The answer therefore differs supplier by supplier, and it is determined by one line on the invoice.

Where borrowing wins

Forgoing the discount means paying 2% more to keep the money twenty extra days. On the discounted amount that is 2.041% for twenty days, which annualises to about 37%.

Now the dollars. On $45,000 a month of purchases:

• The discount is $900 a month, $10,800 a year.
• Borrowing the discounted $44,100 for twenty days at 15.5% costs $374.55.
• Net gain: $525.45 a month, $6,305 a year.

The break-even borrowing rate is 37%. Any legitimate line of credit is far below it. This is one of the few places in business finance where borrowing is obviously, arithmetically correct — and it is routinely missed because the discount is treated as a nice-to-have rather than as the price of a loan you are currently taking.

Not every discount is this valuable. Run the formula on your own terms: the discount divided by one minus the discount, multiplied by 365 divided by the number of days you gain.

• 2/10 net 30: about 37% a year.
• 1/10 net 30: about 18%.
• 2/10 net 45: about 21%.

The first is a screaming buy. The third is a judgement call against your actual cost of funds.

Where stretching wins

Stretching fifteen extra days on $45,000 of monthly purchases permanently frees about $22,500 of working capital, at a cost of zero. Borrowing the same $22,500 for a year at 15.5% would cost $3,488.

Here the arithmetic runs entirely the other way. Trade credit is the cheapest money in your business, and a business that borrows to pay early where no discount exists is paying for something it was already getting.

The cost of stretching that is not on the invoice

Stretching has a price, it is just not denominated in interest.

So the rule is not "stretch everything that has no discount". It is: stretch to the supplier's stated terms, not past them, and never past the point where you become a problem account.

Do this supplier by supplier

Most owners treat payables as one policy. It is not one decision, it is dozens.

1. List every supplier, their stated terms, and whether a discount is offered.
2. Compute the annualised cost of forgoing each discount.
3. Compare each figure against your actual marginal cost of funds — what an extra dollar of borrowing costs you today.
4. Take every discount that beats your cost of funds. Pay everyone else at their stated terms, on the day.

That exercise takes an afternoon and frequently finds several thousand dollars a year. It also makes you a better customer at exactly the accounts where being one matters.

The questions that settle it

1. Which of my suppliers offer a discount, and what is the annualised cost of not taking it? Most owners cannot answer this. It is the whole question.
2. What is my marginal cost of borrowing today, as a percentage? If the only money available to you is a factor-priced advance, the discount may not beat it.
3. What happens to my allocation and my terms if I stretch this supplier? Ask them. The conversation is more productive than the silent stretch.
4. Is the supplier reporting my payment behaviour to a commercial bureau? Ask. If yes, paying on time is building something you can use.

What to ask for, and what to refuse

Ask every significant supplier whether they will offer a discount for early payment. Many do not advertise one and will agree to it, which converts a payables problem into an investment opportunity with a known return.

Ask whether longer standard terms are available on the same price. Net 45 at the same unit cost is the cheapest financing you will ever be offered.

Ask your lender for the cost of a small line specifically sized to your discount-taking cycle. A line drawn for twenty days a month costs very little and pays for itself where the discounts are real.

Refuse to treat stretching as free without checking for a discount clause on the invoice. Refuse to borrow at factor pricing to take a 1% discount — the arithmetic does not work. And refuse to stretch past stated terms without telling the supplier; the call costs nothing and preserves the allocation that a silent delay puts at risk.