Whats wrong with prepaying my vendors?

Question

( This is in reference to wholesale vendors) Everyone else builds credit with their vendors and are billed monthly or every two weeks. I don't like being billed or owing money to anyone other than the IRS. Why is it better to receive and pay rather then pay and receive?

Answer 1

Hello Amber,

There are two schools of thought on this.....

1. Pay for the Material you are ordering from your wholesaler, up front and you are tieing up Valuable Cash that you may need in case of emergency. Material is hard to liquidate. Cash spends readily. BUt by doing it this way you avoid having to pay penalties, and Interest on your Materials thereby keeping your cost lower, and your bottom line healthy/Profitable

2. Order your materials from your wholesaler, and pay for them say 90 days later or whatever terms you set in the sales contract, and sooner or the later the Cost of Dealing with your supplier will go up because their cost have gone up due to having to wait for payments to trickle in, and they are already out the cost of Ordering the material in the 1st place. If you are late paying the supplier then your company gets bad press in the way of Bad Credit Reports. Pay them ontime and your companies Credit rating is boosted!

I hope this help's!

Best of Day's!
Robert

Answer 2

You give your money to the vendors first, and there is no guarantee that they'll all do a good job, if they do the job at all. It seems like common sense that the vendors would work hard, not wanting to lose your business, but the reality is that most vendors are more likely going to do the job right the first time if they know they might not get their money. You give it first and they do a poor job, then you have to go through the trouble of getting that money back. It's more complicating to do it that way in many cases. In addition to this, some jobs can only give an estimate, and do not really know what the cost of the work will be until after the fact. They shouldn't charge you more than the estimate without your permission, but it is more complicating accounting to deal with when it happens. Doesn't make your way wrong, but that is the reality of the situation for most people.

Answer 3

It depends on just how flexible the vendor is. If they are set up where
You call in an order
They ship order
You sell product
They bill you
You pay bill
If there is a diversion from this it creates labor and slows down the system, so if they don't want this diversion they won't be as flexible.
If you've seen the Visa Check card commercial, where everyone is paying with the check card, and all of a sudden someone wants to pay cash, it just slows everything down. It's just a streamlined system, as most business is setup like this. Talk to your vendors and see if they are flexible enough to allow prepayment. We had one setup like that (cash sale only) because we didn't want any employees ordering from there. The larger the company gets the more you will want to have the opportunity to sell the product to the end user first. Hope I've been helpful. Good Luck :<)

Answer 4

If you think that whatever the vendors are giving you will start making money for you right away, then it makes perfect sense to receive first and then pay later because you can already start to make some of the money back before you pay the invoice, making it more manageable surely?

Answer 5

You can run the risk of sending payment, and not receiving your goods. Most companies will get on a Net30 system, or some varient thereof. I'm the head buyer for my company, and the terms you set need to be somewhere in the neighborhood of pay after arrival. That way, you can ensure you get your goods in good order, and if there's any sort of damage to them, you can return them without waiting for a credit, etc.

By not prepaying your vendors, you are actually protecting yourself.

Answer 6

The problem with paying in advance is you do not know what you owe and the vendors will think you have more money so your expenses will be higher than the other competitors.You may end up losing money in the long run.

Answer 7

Because you might pay and NOT receive. What if a vendor is on the brink of financial insolvency and you send $2000 in advance for products which you never receive, since they shut the doors permanently two days after your check was received and deposited ?

Answer 8

it is better for you to pay after you received the mechandise form the Vendor! You never prepay ! Always after done work and done receiving to make sure that you get what you asked for !
Better be safe then sorry !

Answer 9

Most people have a limited amount of cash. So they try to preserve it. Some people borrow money to grow their business. Whether your company is borrowing or has plenty of cash, you will either save interest expense or gain interest income if you pay later rather than earlier. Remember "time is money." Cash in the bank earns interest. Borrowing costs interest. Besides, If you pay before you get something you may get poor service.

Answer 10

Several great answers thus far. In addition of the risk, it plays havoc with your cash flow. If you buy an item, and then sell it and they pay for it, you have positive cash flow. If you pay for an item, take delivery, and then wait for sale, and possible even send an invoice, you could run into a cash flow crisis.