Ordoro Blog

a practical blog for small business ecommerce merchants

Entries Tagged as 'bank'

How to choose a bank for your ecommerce small business?

January 18th, 2010 · 1 Comment · Finance

Wall Street Journal has a good set of articles in their How to Guide for Small Businesses section. Here is an article on how to choose a bank for your small business.

Most small business owners have an option of choosing between a large national bank and a small regional bank. Both have their pros and cons.

Pros of Small, Regional Banks

  1. With small, regional banks, you often get better customer service and one-on-one access to the loan officer. Such banks are usually more flexible and focus more on personal relationships and the borrower’s character than just the numbers on a credit report.
  2. Loan officers at smaller banks have the authority to make loan decisions. With them, the turn arounds for your decision may be faster than with a large national bank which will have to check everything with their corporate office.

Pros of Large, National Banks

  1. Large national banks may be able to give you a better rate than the small regional bank. So if you are more interested in that additional basis point and less on the flexibility, large banks may be better for your business.
  2. Small Business Administration (SBA) loans can be a great source of cash for small businesses. If you are planning to apply for an SBA loan, ensure that your bank will issue SBA backed loans. Large national banks are more likely to offer SBA loans than small regional banks.
  3. Large banks often give you additional perks that small banks may not be able to offer. Examples include payroll, sending invoices, collecting payments and issuing credit cards. However, be aware of additional fees for these services. A recent article on the American Express Open Forum suggests that banks have dramatically increased their fees for individual and small business accounts. According to J. D. Power, 46% of all bank customers reported a problem with bank fees so far in 2009.

Analyze the pros and cons of each option, and talk to officers at both kinds of banks before you decide on a bank for your small business. It is important to build a strong relationship with the officers of the bank no matter what size the bank is.

During this process, certainly discuss the bank rates with the loan officer. Negotiate the bank fees openly. If you can afford to maintain a high balance, then use that to drive fees and rates in your favor. Sometimes moving your personal banking too into the same bank will help negotiate a better deal.

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When to use an early payment discount?

December 15th, 2009 · No Comments · Finance

In this article I will explain the standard terminology used to describe early payment discounts. I will then present a simple approach towards deciding whether to use early payment discounts.

What does “2/10 net 30″ mean?

Early payment discounts are often described using a phrase like “2/10 net 30″. What does it mean? “2/10 net 30” means that the payment is due in 30 days, but the payment is made within 10 days then the payee will get a 2% discount.

Let us break this down in terms of measures we all can easily understand. Let us say a vendor offers you “2/10 net 30″ payment terms. Let us say that there is an outstanding invoice from that vendor for $10,000. In other words, you owe the vendor $10,000 to be paid within 30 days. But if you pay the vendor within 10 days, he is going to give you 2% discount on that $10,000 (equal to $200 in discount)

Early payment discount can be described as an annual interest rate

If you look at the same information from a different angle, the vendor is giving you $200 for getting your money 20 days in advance. Now look at another scenario. What if your bank tells you that, they will give you $200 on your $10,000 if you let them have the money for 20 days. Is this bank offer the same as the vendor offer in financial terms? Turns out that these two offers are one and the same. If such a bank existed, then you might as well deposit your $10,000 for 20 days, earn that $200, and then pay the vendor on the 30th day with $10,000, and pocket the $200. This is the same as paying the vendor $9800 on the 10th day.

Once you agree with that, what is the annual effective interest rate for such a bank account. Let us see. For 20 days, you got 2%. Therefore, for 360 days, you will get 2%*(360/20) = 36% interest. In other words, a vendor that gives you a “2/10 net 30” term is giving you an opportunity to earn 36% annual interest on your cash. That sounds like a great deal, but is it really?

Should I accept an early payment discount?

Here is where the cost of money argument comes to play. As I explained in an earlier article, cost of money of your business is the average interest rate on the money supply into your business. Let us say [based on the calculations explained in the previous article]  your cost of money is 8.67%. In effect, you are borrowing money at 8.67% from your creditors, and then depositing that money at the vendor, and earning an interest rate of 36%. Does that sound like a steal to you? That is because in this case it actually is.

Should I offer an early payment discount?

Now let us reverse the roles and see. What if you are the vendor who is offering “2/10 net 30” terms to your customer? In effect, you are providing the customer with a bank account that provides 36% interest rate. Your business is already borrowing money at 8.67% from your creditors. And now you are offering to borrow money from the customers at 36%? Is that a good deal to you? If you can keep borrowing money from your creditors at 8.67%, this clearly is not a good deal for you.

But if you are running out of cash, and are unable to borrow any more money at 8.67%, then try if you can find another source to borrow money at a rate less than 36%. Offering early payment discounts should be your last resort, if you can no longer borrow money for anything less than 36%.

As explained above, before you take up an early payment discount from your vendor, or before you offer an early payment discount to your customer, think about what the cost of money for your business is.

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