New Study of Small Business Capital Sources Uncovers Savings Opportunity Through Optimal Use of Trade Terms
Small Businesses Turn to Trade Terms as an Important Source of Financing and Save $11.8 Billion Annually through Early Pay Discounts
— The PlumCard(SM) – “The First Everything, Everywhere Trade Terms Card from American Express OPEN” – Delivers Trade-Like Terms For Small Business Owners —
NEW YORK.- American Express OPEN citing a new study of capital sources for small business, identified trade terms as a popular and effective financing tool for delivering significant cost savings to small businesses, including $11.8 billion annually through early pay discounts. In order to make trade terms more accessible and easier to use, OPEN presents the PlumCard(SM) as one opportunity for small business owners to optimize the use of trade-like terms in the transaction simplicity of a Card.
The study, “Trends in Small Business Growth and Capital Sources,” was commissioned by American Express OPEN and conducted by Arduin, Laffer & Moore Econometrics (ALME) to demonstrate the impact small business has on the overall economy and identify trends in small business financing. The study highlights savings generated by trade terms through early-pay discounts, enhanced financing terms, and improved efficiencies in accounts receivable expense management.
“At American Express OPEN, we understand that continued innovation in financing will unlock further opportunities for small businesses to grow and help stimulate the economy,” said Raymond Joabar, senior vice president and general manager, American Express OPEN. “The PlumCard presents an efficient way to access the benefits of trade-like terms, an important method of small business financing, as evidenced by the ‘Trends in Small Business Growth and Capital Sources’ study.”
Impact of Trade Terms on the Small Business Environment
According to the study, approximately 60% of small businesses have access to some form of trade terms, making trade terms – along with credit cards – one of the most widely used form of small business financing.
One aspect of trade terms, early pay discounts – typically 2% for payment within 10 days – save small businesses billions of dollars each year, but are not available to all small businesses or on all purchases. Of the 60% of small businesses who use trade terms, only 38% are offered the cost-saving benefits of the early pay discount. According to the study, US small businesses save an aggregate of $11.8 billion annually through early pay discounts.
Trade terms balances, on average, must be repaid within 30 days. Although late payment penalties as a percent of total costs are not particularly high for many small businesses, they aggregate to $2.9 billion annually. The majority of these penalty costs, $1.8 billion, are incurred by the construction industry, which is the leading small business contributor to the US economy. Extending the time period for repayment on trade term financing beyond 30 days could help many small businesses more effectively manage the flow of incoming receivables and outgoing payments and help reduce overall late payment expenses, particularly during slower economic times.
Cash flow is a significant concern for small businesses, especially among those who offer trade terms. In fact, two-thirds of small businesses report frequent or periodic cash-flow challenges, and 30% cite collecting money as the main reason (1). For sellers, the PlumCard(SM) can help reduce accounts receivable risks and generate goodwill among customers who benefit from favorable trade-like terms as a result of using the Card.
“Our research indicates that small businesses recognize the benefits of trade terms and the economic value it presents when used optimally,” said Wayne Winegarden, senior economist and study author, Arduin, Laffer & Moore Econometrics.
The PlumCard(SM) is the first OPEN product exclusively designed to help deliver the economic advantages of trade-like terms in the transaction simplicity of a Card for small businesses with high materials costs and variable cash flow.
“The PlumCard breaks through the market barrier of restricted trade terms to enable more business owners to benefit from the economic advantage of early-pay discounts, extended payment terms and the choice to manage cash-flow based on individual business needs,” said Joabar.
The PlumCard(SM) taps this opportunity by offering small business owners flexible trade-like terms – the option to receive an early pay discount of up to 2% on virtually everything they buy with the Card or the ability to defer payment up to two months, simply:
* pay the bill in full within 10 days of the billing cycle and receive a 2% discount on new spending when it exceeds $5,000. Any month the charges total $5,000 or less receive a 1% discount for early payment (2).
* defer payment up to two months interest-free by paying 10% of the balance by the date indicated in the billing statement.(3)
Cardmembers have the flexibility to choose which cash flow management option is best for their business each month.
“Managing cash flow is a big challenge for small business owners. Trade terms are a widely used form of small business financing, but it isn’t universally available and the trade terms aren’t consistent,” said Joabar. “OPEN understands that for the average small business owner, better financing and more efficient use of terms goes straight to the bottom line. We’ve introduced the PlumCard(SM) to help small business owners better manage cash flow and free up working capital through the optimal use of trade-like terms.”
Applications for the PlumCard(SM) are available at www.plumcard.com.
Role of Credit Cards in Small Business Financing
The launch of the PlumCard(SM) takes into account additional key findings from “Trends in Small Business Growth and Capital Sources” including the growing use of credit cards and an increase in availability and access to financing as a direct contributor to small business’ robust growth.
Small business’ share of the private economy is 50.7%, and small businesses created 60% of new jobs from 1997-2004.
The use of credit cards and lines of credit by small businesses has increased significantly since 1993. For the first time, small business owners’ use of business credit cards (48.1%) has eclipsed their use of personal cards (46.7%) and is expected to grow. The majority (74%) of small business owners use credit cards as ‘charge’ cards for transactional purposes and pay their balances in full each month. Approximately one-in-four use credit cards as a source of interim or long-term financing, incurring interest costs.
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