Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Buyer Used Partial Prepayments to Lock in 15 Percent Savings
Transcript
- Lucas: You know that moment in a negotiation when you've pushed on price, you've pushed on volume, and the supplier just won't budge any further? There's a move that's almost invisible in most procurement playbooks, and it doesn't require any new software or a multi-year commitment. It's offering to pay early — specifically, a partial prepayment — in exchange for a lower unit price. Luna: Right, because the supplier's cash flow is often a bigger pain point than their margin. If they're sitting on receivables for 60 or 90 days, getting money sooner has real value to them. Lucas: Exactly. And that value is something you can capture. In 2024 a mid-size industrial manufacturer in the Midwest — let's call them Allied Components — was spending about $2.4 million a year with a single metal-stamping supplier. The contract was up for renewal, and the supplier was holding firm at a 3 percent increase, citing raw material costs. Allied's buyer, a woman named Sarah, didn't have a second source to threaten with. But she noticed something in the supplier's financials: they carried heavy debt and were stretched on DPO — days payable outstanding — meaning they needed cash fast. Luna: So she turned the problem around. Instead of asking for a lower price, she asked what the supplier would give up if she paid them faster. Lucas: Precisely. Sarah proposed a 35 percent prepayment on each quarterly order — so roughly $210,000 upfront every three months — with the remaining 65 percent paid on standard net-30 terms. In exchange, she asked for a 15 percent reduction on the unit price across the entire contract. The supplier came back with a counter at 10 percent, they settled at 12.5 percent. That took the annual spend from $2.4 million down to $2.1 million — a saving of $300,000 a year. Luna: Three hundred thousand dollars. For just shifting the timing of cash. What did the supplier get out of it? They effectively got a low-cost source of working capital. Lucas: Right. If the supplier's alternative was a line of credit at, say, 8 or 9 percent interest, getting $210,000 three months early — that has a tangible value. Even at a conservative 6 percent annual cost of capital, the value of that early cash to the supplier is about $3,150 per quarter, or $12,600 a year. Meanwhile, the 12.5 percent price cut costs the supplier $300,000 in revenue. That's a big gap — so why did they agree? Luna: Because the price cut is on every unit they sell, but the prepayment is a fixed amount. The supplier's math only works if the discount isn't applied to the entire volume — maybe they segmented it. Or maybe the prepayment improved their debt covenant ratios enough that it was worth it. Lucas: That's exactly what happened. Sarah structured the deal so the 12.5 percent discount applied only to the first 35 percent of each order — the prepaid portion. So the effective discount on total spend was actually about 4.4 percent. The supplier still got full price on the remaining 65 percent. That made the math palatable. The supplier improved their cash conversion cycle by 45 days on a meaningful chunk of revenue, and Allied locked in a net saving of about $105,000 a year. Luna: So the prepayment acted like a discount on the early portion, not a blanket cut. That's a clever structure. Did Sarah have to get internal approval? Because prepaying suppliers ties up cash — that's a real cost to the buyer. Lucas: It is, and she had to make the case to her CFO. Allied's own cost of capital was about 7 percent. So tying up $210,000 for an extra 60 days — relative to normal payment terms — costs them roughly $2,400 in foregone interest or borrowing costs. But they saved $105,000. The net benefit was over $102,000. The CFO signed off in a day. Luna: That's a 40-to-1 return on the cash tied up. I can see why that passed. Were there any hidden risks? What if the supplier shipped defective parts after getting prepaid — now the buyer has less leverage. Lucas: Sarah handled that by tying the prepayment to the previous quarter's performance. So the prepayment for Q2 was based on Q1's delivery and quality scores. If the supplier failed, the prepayment amount decreased. It created a self-correcting mechanism. She also added a clause that if the supplier's credit rating dropped below investment grade, the prepayment would be suspended. That covered the insolvency risk. Luna: So it's not just 'pay early and hope for the best.' It's a structured instrument. I'd love to hear how she found the right supplier for this — because not every supplier will value cash the same way. Lucas: That's a critical point. Sarah pre-qualified suppliers by looking at three signals: high debt to ebitda ratios, slow inventory turnover, and a history of using factoring. Any supplier that factored receivables was a strong candidate, because they were already paying someone else to get cash faster. If you can intercept that need, you capture the value that would otherwise go to a bank. Luna: So the buyer essentially becomes a low-cost lender. The supplier gets cheaper financing than they'd get from a factor, and the buyer gets a price break. It's a win-win — but only if the buyer has the cash to spare. Lucas: Exactly. And that's the key constraint. This only works if the buyer has strong liquidity or a low cost of capital. A cash-strapped startup couldn't pull this off. But for a company sitting on a pile of cash earning 2 percent in a money market fund, swapping that for a 7 percent effective return from supplier prepayment is a no-brainer. Luna: It also requires trust. You're essentially lending to your supplier. Sarah must have had a good relationship with their finance team to pull off the data sharing. Lucas: She did. They'd been working together for six years. But she also formalised it. The prepayment agreement included a confidentiality clause around each other's financial data, and the terms were reviewed quarterly. It wasn't a handshake deal — it was a side letter to the master agreement. And she benchmarked the discount against what the supplier's factoring rate would have been, so both sides knew the reference point. Luna: Let's talk about the broader applicability. Could a smaller buyer — say, a $10 million company — use this? The numbers would scale down, but the principle holds. Lucas: Sure. If you're spending $200,000 a year with a supplier and you offer a 30 percent prepayment on each order — $15,000 per quarter — you might negotiate a 5 to 10 percent discount on the prepaid portion. The absolute savings might be only $5,000 a year, but the percentage return on the cash tied up is still attractive. The key is to find a supplier where the cash squeeze is real. A niche raw material supplier, a small contract manufacturer, a logistics partner — those are often capital-constrained. Luna: And the buyer's own cost of capital is the threshold. If your company's borrowing rate is 10 percent, you need the effective return from prepayment to exceed that. Otherwise, you're better off investing the cash elsewhere. Lucas: Right. Sarah built a simple spreadsheet model that calculated the net present value of the prepayment vs. the discount. She used Allied's weighted average cost of capital as the discount rate. If the NPV was positive, the deal was worth doing. In her case, it was strongly positive. I'd recommend any buyer considering this to run that same calculation — it's a five-minute exercise in Excel. Luna: One more thing — did this affect the supplier relationship long term? Sometimes when you inject financing into a relationship, it changes the dynamic. The supplier might feel beholden. Lucas: Sarah told me it actually strengthened the relationship. The supplier's CFO told her that the prepayment helped them avoid drawing down a revolving credit line during a tight quarter. They started sharing more forecast data with Allied because they wanted to keep the program going. The buyer got better visibility into the supplier's capacity planning. It became a strategic partnership, not just a transactional one. Luna: That's the ideal outcome. You save money and you get better information flow. If today's episode gave you a concrete idea you could take back to your own procurement team, that's exactly what we're here for. And these conversations stay ad-free because of listeners who find value in them — if that's you, you can support the show at buy me a coffee dot com slash fexingo. Lucas: Yeah, and it genuinely helps us keep digging into cases like this one. So back to the prepayment play — I want to talk about one pitfall that Sarah almost missed. She initially proposed the prepayment as a fixed percentage of every order, but didn't cap the total exposure. If the supplier had ramped up volume dramatically, Allied could have been prepaying hundreds of thousands more than planned. She added a quarterly cap of $250,000 in prepaid amounts, which protected Allied if demand spiked. Luna: A cap is smart. So the structure should include both a performance trigger and a volume limit. Any other safeguards you'd recommend? Lucas: One more: audit rights. Sarah included a clause allowing Allied to audit the supplier's use of the prepaid funds — not to micromanage, but to ensure the cash was going toward raw material purchases or production, not dividends or executive bonuses. That kept the intent aligned. And she made the prepayment renewable only upon mutual agreement, so either side could opt out if the terms stopped making sense. Luna: So it's a flexible, opt-in arrangement. That reduces commitment anxiety. I'm thinking about the reverse scenario: could a supplier ever offer a discount for early payment proactively? Have you seen that happen? Lucas: Occasionally. Some suppliers publish standard early-payment discount terms — like 2/10 net 30, where you get 2 percent off if you pay within 10 days. That's the most common form. But those are usually small, fixed percentages. The Sarah approach is more tailored: you negotiate the discount based on the supplier's specific cost of capital. That can yield a much better rate. A 2 percent discount on 20 days early is about a 36 percent annualised return — but it's only on the invoice amount. Sarah's deal was a 12.5 percent discount on a portion of spend, which is bigger in absolute terms. Luna: Right, because standard terms are usually too small to move the needle on a $2 million spend. So the lesson is: if you have a concentrated spend with a cash-constrained supplier, do the analysis, propose a prepayment structure, and negotiate from a position of understanding their finance. You might unlock savings that conventional haggling never would. Lucas: Exactly. It's a tool for the toolkit. Not every situation calls for it, but when it fits, it fits beautifully. And it builds a deeper relationship in the process. That's the kind of procurement win that gets noticed by the CFO. Luna: Great episode. Next time we'll look at how buyers are using consignment inventory to shift carrying costs back to suppliers — a different kind of payment innovation. Lucas: Looking forward to it. Until then, try running the NPV on your top supplier spend — you might be surprised what you find.