Paying vendors on time and according to the agreed-upon terms can help to establish trust and build strong working relationships that can allow for flexibility when it’s necessary. It should come as no surprise, then, that vendor payments should be a priority for any small business.
Here at Select Funding, we understand the importance of timely payments and that’s why we provide working capital for small businesses at affordable rates. Since our clients often ask us about how to manage vendor payment, we’ve put together this guide to paying vendors, including information about invoices, payment terms, payment methods, and more.Who Is Considered a Vendor?
In business, a vendor is any person or entity that sells goods or services to a company. While there is a similar function in consumer commerce, in business, a vendor is usually somebody who supplies raw materials or services, but may also provide finished products.
In most cases, vendors are not manufacturers. However, there are exceptions. For example, a small business might pay a vendor to manufacture containers for its products or print labels for them.
Another important characteristic of vendors is that they often buy products or goods from one entity and sell them to another. Most wholesalers are vendors because they purchase items from manufacturers and sell them to retailers.
What is a Payment Vendor?
A payment vendor is a third-party company that processes payments between businesses and their suppliers or customers.
Some examples of well-known payment vendors are PayPal, Apple Pay, Google Pay, and Stripe. These companies act as go-betweens to facilitate payments. With Apple Pay, Google Pay, and Stripe, you can process credit card payments. PayPal allows users to pay with funds in PayPal or to pay via a linked bank account.
How Do Businesses Pay Vendors?
Businesses may pay vendors in a variety of ways and on different timeframes, depending on what the two parties have agreed.
Payment Time Frames for Vendors
The most common time frames for vendor payments happen when businesses buy goods on terms, meaning that the vendor has extended credit to them and they have a set number of days to pay. Net 30 is often the default, but some vendors require payment on receipt or in 5, 10, 15, or 20 days, and some will extend credit out to 60 or 90 days.
When a vendor gives a business credit terms, they may also offer a discount for expedited payment. For example, terms of 2% Net 10/Net 30 would mean that the business would get a 2% discount for paying within 10 days of the invoice date and would otherwise have 30 days to pay the full amount.
Payment Methods for Vendors
Businesses may pay vendors using a variety of payment methods. Here are some of the methods most commonly used:
- Company check (paper check or electronic check)
- Company credit card
- Cash
- ACH
- Wire transfer
Each of these methods has its advantages. Checks create an easy-to-access paper trail and allow businesses to pay vendors directly from their bank accounts. The same is true of ACH transfers and wire transfers, although these two options come with fees that accrue to the company making the payment, while checks typically do not.
There is also the option of paying vendors with a credit card or with cash, and many companies use these options. Trader Joe’s is famous for operating on a cash basis. Credit cards have their advantages but some vendors prefer not to be paid with a credit card because they will absorb the credit card processing fee.
The timing of vendor receipt of payments is part of the decision as well. Cash and wire transfers are available immediately. ACH transfers may take two or more days to go through. Checks that are sent through the mail take several days, and credit card payments may take a day or two to process.
Steps to Set Up a Vendor Payment System
Now, let’s walk through the steps to set up a vendor payment system for your small business.
Choose Accounting Software
The first step to setting up a vendor payment system is to choose accounting software that works for your business. Many small companies use QuickBooks because the online version offers options to create and send invoices, collect payments, pay taxes, and more.
You’ll want to be sure to choose software that makes it easy to manage vendor payments. Some features to prioritize include invoice categorization, payment automation, and tax features such as the ability to generate 1099 forms to send to your contractors and freelancers.
Enter Vendor Information into Accounting Software
Once you have chosen account software to use, the next step is to enter your vendors’ information into your system. It’s essential to be accurate. We suggest creating a naming protocol for vendors even if only one person is handling the data entry. You want to make sure that it’s easy for someone to verify whether a vendor is already in the system to avoid multiple entries.
Your vendor information should include the vendor’s legal name, payment remittance address, terms, and contact information. Any invoices you receive should be entered under the vendor’s name for payment and include a purchase order number.
Enter Invoices
The next step is to enter any invoices that have been received that have not yet been paid. Some accounting systems allow companies to upload electronic invoices and if you have that option, it’s the quickest and easiest way to get your invoices into the system.
If you enter invoices manually, make sure that they are attached to the correct vendor and put a QC system in place to verify the accuracy of your data entry, including information about due dates, purchase orders, and discounts.
Set Up Automatic Payments
Setting up automatic payments is one of the best ways to make sure that you pay vendors on time—and taking this step can also help you build your business credit and/or increase your business credit score.
If you’re paying by check, then you may want to cut checks once a week or once every other week. Whatever your schedule is, be sure to schedule invoice payments for a time before the due date to avoid late fees and past due payments that can impact your credit.
Payments that you make via ACH or wire transfer will also need to be scheduled and must be performed manually, since your bank or credit union will require authorization to send money. You can schedule these payments in advance if your financial institution allows it and the same is true of credit card payments.
Mark Invoices as Paid
The final step is to mark invoices as paid. If your system sends payments automatically or allows you to schedule them in advance, then it may also mark the invoice as paid. You should still check to make sure that the invoice is closed.
Closing invoices is essential because it means you’ll be able to run an open accounts payable report to see what’s outstanding and you won’t need to worry about duplicating payments.
Vendor Payment Best Practices
Here are some important best practices to implement to help you manage vendor payments and keep your business finances in good order:
- Create a simple vendor payment workflow. Put it in writing and simplify to make sure anybody who needs to can follow it. Make sure to include a protocol for vendor naming and data entry, as we noted above.
- Automate where you can. Business process automation can eliminate mistakes and streamline your process.
- Put controls in place and limit access. Access to your vendor payment system (and accounting software system in general) should be on a need-to-know basis. Ideally, one person should handle vendor payments and have a backup trained if they’re not available. We suggest having someone other than the person who will sign the checks handle the check run as a control.
- Renegotiate terms/ask about discounts. Setting up your vendor system gives you the opportunity to renegotiate terms with your vendors and ask for discounts. Many vendors will provide a significant discount, typically between 1% and 5%, for rapid payments. If you can get discounts, they can save you thousands of dollars over the course of a year.
- Prioritize invoices based on due dates. You might be tempted to pay invoices as soon as you receive them, but that can have a negative impact on your cash flow. Instead, prioritize based on due dates and factor discounts into your decisions.
- Go paperless if possible. Paperless invoicing and payments are the way to go, both in terms of convenience and to minimize waste. If your vendors send you electronic invoices, it’s likely you’ll be able to add them directly to your accounting system for payment. While writing checks is an option, your best bet is to use electronic checks or another form of paperless payment, such as an ACH, wire transfer, or credit card.
- Run an accounts payable report regularly. Even if you automate your payments, you should still run an AR report regularly to make sure everything has been paid. Most accounting systems will let you pull up an on-screen report, which you can use to verify your payments.
Using these best practices will help you manage your vendor payments, avoid late payments, and build solid business credit to help you qualify for financing and attract investors.
Get Equipment Financing to Set Up a Vendor Payment System
As a small business owner, it’s your responsibility to create a streamlined and accurate vendor payment system to pay your vendors in a timely manner, take advantage of discounts, and improve or solidify your business credit. The steps and best practices we’ve included here will help you build trust with your vendors and pursue your business growth goals.
Do you need equipment financing to pay for accounting software and create a vendor payment system? Select Funding is here to help! Click here to read about our equipment financing and start the application process today.
