How you can order more inventory, improve profitability, and pay for it later
In the competitive landscape that small and medium-sized businesses (SMBs) face, ordering larger volumes and thereby negotiating better prices can significantly enhance profitability. This strategy, however, requires upfront capital, which many SMBs often lack. By leveraging purchase finance products, business owners can overcome this barrier and achieve higher profitability. This article explores how this works.
Volume discounts are very common
Volume discounts are price reductions suppliers offer for larger quantity purchases. These discounts benefit both suppliers, who secure larger sales, and buyers, who lower their cost per unit. Suppliers typically offer tiered pricing, where prices decrease at certain quantity thresholds, or seasonal and bulk purchase discounts.
How businesses can get volume discounts
SMBs often struggle with the upfront capital required for large purchases that generate meaningful volume discounts. This financial barrier can be overcome by purchase finance products, which provide the necessary funds to place larger orders. This access to capital improves cash flow, enhances negotiating power with suppliers, and ultimately reduces the cost of goods sold (COGS).
Calculating the Cost-Benefit of Financing
Before taking on a purchase finance product, a business should conduct a thorough cost-benefit analysis to ensure the savings from volume discounts exceed the total cost of financing. For example, consider a $50,000 loan at 1.5% monthly financing cost for six months:
Financing Amount: $50,000
Term: 3 months
Effective interest per month: 1.5%
Effective interest for 3 months: 4.5%
Total interest for 3 months: $50,000 * 4.5% = $2,250
Required discount savings: $2,250
If the business negotiates a 4.5% volume discount on a $50,000 purchase, the savings would match the interest cost, making the financing effectively self-funding. This example allowed the business to pay for their inventory 3 months after purchase.
Risks and Considerations
While leveraging loans for volume discounts is beneficial, it is not without risks. Businesses should ensure they can meet repayment obligations even if savings are not realized, align large inventory purchases with market demand, manage high-interest rates that could offset discount benefits, and choose reliable suppliers to avoid delivery or quality issues. Also, additional factors, such as the efficiency gain on shipping costs and potentially higher storage costs, are not considered in the example above and need to be evaluated on a case-by-case basis.
Takeaway
Negotiating better prices through larger volume purchases is a viable strategy for businesses looking to enhance profitability. By leveraging purchase finance, businesses can overcome capital barriers and unlock significant cost savings. However, it is crucial to conduct a thorough cost-benefit analysis and consider potential risks. With careful planning and execution, businesses can use purchase finance products to secure better pricing, improve cash flow, and drive growth.
How aqeel can help
aqeel’s Sell First, Pay Later product enables businesses to self-select payment terms and align these with their typical revenue collection cycles. A business can purchase more at once and pay for their purchases after having collected revenues, often at neutral cost or even at a positive margin.
At aqeel, we have designed our products specifically for businesses that face long cash conversion cycles. For more information on how aqeel can assist you, visit our website or contact our support team today at hello@getaqeel.com.