How Early Payment Discounts Can Help Drive Better Supplier Relationships

early payment discounts better supplier relationships

Starting a business is a long, detailed process. You've spent countless hours developing and refining your business plan. You've lined up investors or secured the necessary funding to get your operation rolling. You've even begun implementing supply chain management and risk assessment systems. 

The next challenge is building a base of suppliers. Unfortunately, unforeseen circumstances-- like the COVID-19 pandemic--can throw a bit of a wrench in the works. Liquidity for many suppliers has diminished through the course of the year, creating a potentially deleterious effect on the supply chain. 

As an entrepreneur, you want to succeed, stay in business and (hopefully) turn a profit. Luckily, there is somewhat of a solution to this problem in the concept of a discount program aimed at your suppliers. The program—known as an EPD—is a valuable tool that will mutually benefit each party involved without causing any lingering damage or problems down the line. Because of low treasury rates at the moment combined with an EPD’s incredible return of investment potential, offering one of these programs to suppliers is a good idea right now. 

What Is An EPD? 

Simply put, EPD stands for Early Payment Discount. It's essentially a program that provides discount on a supplier’s invoice in exchange for emitting payment to the supplier early. Basically, the company ends up paying less than the full amount of the invoice or PO while the supplier itself gets paid earlier than we would under the organization's standard payment terms. 

Who Benefits From An EPD? 

EPD programs benefit both suppliers and the businesses themselves. An EPD is beneficial, whether it's a small or midsize operation. Although these operations typically charge less than larger ones they still make up about 20% of business spend. That's a decent number when it comes to supply-chain management. Including them in an EPD program is useful to keep them solvent and for the buyer to obtain quality service from the supplier. Extending the EPD to bigger suppliers helps build your supplier base and mitigate risk. 

How Different EPD Discounts Work 

Static discounts are a fairly straightforward concept. In a static discount, the company will offer predefined early payment terms to a supplier. During their invoice stage, the supplier chooses the term that benefits them most based on what kind of offer the business makes them. This is essentially a way the business cannot negotiate the completion of work earlier by giving a small discount to the supplier for completing the work earlier. Using a static discount is ideal for any supplier desiring early payments and suppliers who submit invoices through a portal / software and are able to choose when they get paid in advance. 

On the other hand, dynamic discounts Work more as a collaboration on terms rather than a set idea. When the supplier submits their invoice or PO and gets it approved, can submit an offer for early payment. the supplier can then choose what they would like their discount rate to be if an early payment is approved.The ability to offer a discount anytime and choose the discount rate renders the discount more dynamic than the rather rigid static discount. In dynamic discounting, the supplier must work more closely with the client/business in order to work out the terms and negotiate their early payment discount. 

Whichever discount a supplier chooses during their bid process, can reveal quite a bit of information about them. Especially, their typical pricing structure and costs associated with their business. 

How An EPD Program Fosters Success 

An EPD program helps you manage your own spend and optimize your own operation while supporting a cadre of suppliers. Integrating your technology to allow for easy program adoption while supporting business choice and flexibility sets each party up for success. 

Discounts will vary based on a few factors determined between the business and supplier. Discount is determined to be at 2% 10 Net 30, for example, the company can deduct 2% from the invoice price if they pay by day ten of the 30 day period. It may not seem like a significant amount of savings on the surface, but it ultimately leads better service from smaller to midsize to suppliers over time. 

For more detailed information read more about the concept of an early payment discount online and perform in-depth research to learn as much as possible about the program prior to implementing it into your own business plan. 

Implementing Your Own EPD 

Now that you’ve decided to take advantage of the EPD program, how do you implement and integrate the concept into your own business? It's simple, but not without its own challenges. First, no which of your suppliers would benefit most from the EPD program. make it easy for the suppliers to adopt the program and finally learn to manage your invoice , possibly automating some aspects of your supply-chain management to achieve the desired outcomes. Overall, an EPD program can be beneficial not just for the supplier but for your business as well.

Official Bootstrap Business Blog Newest Posts From Mike Schiemer Partners And News Outlets