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A Trade Terms Primer

American Express OPEN

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May 11, 2009

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While you’re being inspired by some of the sharpest minds in small business, take a timeout to tap into the expertise of American Express OPEN.

You may have heard the expression “trade terms” used a lot, especially in this economy –mostly within industries for which supplies, inventory or raw materials are typically purchased and paid for over time. But any business that experiences cash flow crunches from time to time can benefit from trade terms. In short, trade terms let you defer payment when cash is tight, and earn discounts for early payments when your business is flush.

As a customer for these types of products, you can keep cash on hand when you need it by deferring payment. As a supplier, deferred payments make it easier for companies to buy from you, which can expand your potential base. Consider asking your existing vendors and suppliers about trade terms. Before you do though, use the tips below to help you understand how they work, how to get the most from them, and how to negotiate the best trade terms deal.

How are trade terms negotiated?

Common business-to-business trade terms are “net 30” or “net 60,” meaning that a business has 30 or 60 days from the invoice date to pay in full for the purchase. Some businesses offer incentive discounts to encourage early payment, such as a discount of 1 to 2%, for invoices paid within 10 days.

What are the benefits of trade terms?

When your business is enjoying a strong cash position, you can take advantage of the early payment discount feature of trade terms. Or, in a cash crunch, you can use trade terms to defer payment until additional cash comes in. Either way, you have the flexibility to manage your cash flow so you don’t overextend yourself.

What kinds of businesses can benefit from trade terms?

Trade terms work well for many businesses in industries such as agriculture, automotive, construction/contracting, electronics, health service providers, medical equipment, manufacturing, restaurant, retail and wholesale trade. These are some of the industries that typically purchase materials up front and wait for job payment later.

How can I get trade terms if my vendors don’t offer them?

Even if your vendors don’t offer trade terms, you can get them for your business with the Plum Card from American Express OPEN.

With the Plum Card®, you can receive a 1.5% discount on eligible purchases when you pay within 10 days of the billing date. Or, you can defer payment up to 60 days—without interest— the choice is yours every month. If you need more time, you can pay 10% by the “Please Pay By” date on your statement and defer the rest for another 60 days without interest. It’s a smart way for business owners to keep payments flexible, while maintaining control over your cash flow. Apply now, and we’ll waive the first year’s annual fee of $185 for the Basic Card.