Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How to Use Trade Credit Like a Free Loan from Suppliers
Transcript
- Lucas: Luna, I want to start with something that sounds too good to be true: your suppliers may be willing to give you an interest-free loan, and you might be leaving it on the table. Luna: Okay, that got my attention. You're talking about trade credit, right? The net-30 or net-60 terms on invoices? Lucas: Exactly. Trade credit is the single biggest source of short-term financing for small businesses in this country. According to the Fed's Small Business Credit Survey, something like 60 percent of firms use it. But most owners treat it as a payment deadline—they just try to pay as late as possible without getting in trouble. They don't think about it as a strategic lever. Luna: So what should they be thinking instead? Lucas: That trade credit is literally a zero-interest loan for the length of the term. If a supplier gives you net-30, and you pay on day 30, you've effectively borrowed that money for a month at zero percent. Compare that to a business line of credit, which might cost you 8 to 12 percent annually. Or a credit card, which can be 18 percent or more. Luna: Right, so the longer the term, the more valuable the loan. But suppliers don't just hand out longer terms for free. There's usually a trade-off. Lucas: Absolutely. The classic trade-off is the early-payment discount. A supplier might offer something like '2/10 net 30.' That means you get a 2 percent discount if you pay within 10 days, otherwise the full amount is due in 30. A lot of owners see that and think, 'Hey, 2 percent off—free money.' And sometimes it is. But you have to do the math. Luna: I've seen that math. Foregoing a 2/10 net 30 discount is effectively paying an annualized interest rate of something like 36 percent, right? Because you're giving up 2 percent to borrow for an extra 20 days. Lucas: You beat me to it. Yes. The effective annual rate on passing up that discount is roughly 36 percent. So if you can borrow at a lower rate elsewhere, you should absolutely take the discount. But here's the thing—a lot of businesses don't have a cheaper source of credit. For them, stretching payables to day 30 and skipping the discount makes sense. Luna: But what about stretching beyond 30? I know some businesses routinely pay on day 45 or 60, even when terms say net-30. Lucas: That's a different game. If you consistently pay late without agreement, you risk damaging the relationship. But there's a right way to do it: negotiate longer terms upfront. A bakery in Portland I read about—Midnight Bread Company—went from net-30 to net-60 with their flour supplier simply by asking. They showed the supplier their steady order history and committed to a minimum monthly volume. That extra 30 days of float saved them roughly $12,000 a year in avoided interest on a working capital line they no longer needed. Luna: So the key is asking for terms that match your actual cash conversion cycle. If your customers pay you in 45 days, you want your suppliers to give you at least 45 days. Lucas: Exactly. And that's where the discipline comes in. You have to know your own numbers. Most business owners can tell you their revenue off the top of their head. Far fewer know their average receivables collection period or their days payable outstanding. Luna: Let me guess—if your DPO is lower than your DSO, you're essentially financing your customers with your own cash. Lucas: Nailed it. And that's the silent killer of small business cash flow. You want your DPO to be at least as high as your DSO. Ideally higher. That way your suppliers are financing your receivables, not the other way around. Luna: So what's the practical first step for a business owner who wants to start using trade credit more strategically? Lucas: Step one: pull your last twelve months of supplier invoices and calculate your average DPO. Then compare it to your average DSO. If DPO is lower, you have a gap. Step two: pick your top three suppliers by spend. Check their standard terms. Most will list them on their website or contract. Step three: if those terms are net-30 and you need net-45, ask. And bring data—show them your payment history, your order volume, your credit score if it's good. Luna: What about the idea of using trade credit as a line of credit? Like, if you have multiple suppliers, you could effectively stack their terms to cover a big order. Lucas: That's absolutely a strategy. A furniture maker I spoke with does exactly that. They get net-60 from their lumber supplier, net-45 from their hardware supplier, and net-30 from their finishing supplier. By timing their orders so that the lumber arrives first and the finishing supplies last, they can assemble and sell a dining table before any of the invoices come due. Their cash conversion cycle is negative—they get paid before they pay their suppliers. Luna: That's the dream. Negative working capital. Amazon and Dell have built empires on that model. Lucas: It's not realistic for every business, but the principle applies. The more you can align your payment outflows with your cash inflows, the less external financing you need. Lucas: And on that note—if today's conversation has moved your thinking forward in some small way, honestly, if it was worth a coffee to you, that's the link: buy me a coffee dot com slash fexingo. The smallest possible ask. It's what keeps this show ad-free and independent. Luna: Yeah, and it really does make a difference. Every bit of listener support helps us keep digging into these practical topics that don't get covered elsewhere. Lucas: Alright, back to trade credit. One mistake I see a lot: businesses that take early-payment discounts even when they're cash-strapped. They think they're saving money, but they're actually hurting their liquidity. Luna: Because a 2 percent discount on a $10,000 invoice saves $200. But if paying early drains your bank account and forces you to draw on a credit card at 18 percent, that's way more expensive. Lucas: Right. The discount is worth it only if you have the cash to spare. If you're borrowing to take the discount, do the annualized math. Compare your borrowing cost to the discount rate. Most of the time, the discount wins if you can pay from operating cash flow. But if you're using a high-cost loan, it can be a net loss. Luna: So the rule of thumb: never take a discount if it means triggering a higher-cost debt. And never stretch payables past the negotiated terms without permission. Lucas: Exactly. And one more thing: trade credit can also build your business credit score. Dun & Bradstreet and Experian track your payment patterns. Paying consistently on time—or early when it makes sense—can boost your credit profile, which helps you qualify for better terms from other suppliers and even bank loans. Luna: So it's not just about the float. It's about building a reputation that gives you more leverage over time. Lucas: Exactly. Trade credit is a relationship asset. The better you treat your suppliers, the more they'll work with you when you need flexibility. And in a tight economy like the one we're in right now—May 2026, with interest rates still elevated—that flexibility is gold. Luna: Any final tip for someone who wants to start tomorrow? Lucas: Pick one supplier you've worked with for at least a year. Call them. Say you're reviewing your payment terms and ask if they offer a longer term for consistent or larger orders. You might be surprised how often the answer is yes. And if they say no, ask what it would take. Maybe a volume commitment or a personal guarantee. You can always negotiate. Luna: And if they say yes, that's effectively a zero-interest loan. Not bad for a phone call. Lucas: Not bad at all.