Evaluating Asset Based Borrowing Base Formulas in Growth Financing
Evaluating borrowing base availability demands stress testing collateral eligibility carve-outs against dilution and liquidation haircuts.
Trade Credit Discount
Meaning
Pricing incentives offered by a seller to encourage early payment of an invoice reduce the total cost of goods for the buyer. Entering a trade credit discount usually appears as a notation like two ten net thirty on a bill. This means the buyer can take a two percent deduction if they pay within ten days.
Payment Incentive
Suppliers use these terms to accelerate their own cash inflows without resorting to external borrowing. Offering a trade credit discount is often cheaper than maintaining a large line of credit with a bank. It also reduces the risk of customer default by shortening the time the debt stays on the books.
Early Settlement
Choosing to pay early depends on the buyer’s internal cost of capital compared to the annualised rate of the offer. A two percent discount for paying twenty days early equates to an annualised return of over thirty six percent. Most profitable companies take every trade credit discount available because the savings are higher than any interest they could earn on cash.
Cash Flow
Managing the timing of payments is a strategic decision. If the trade credit discount is missed, the company pays a higher price for its inputs. This trade off is monitored to ensure the efficient use of liquid assets.