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Should my business offer early payment discounts?

Time machine

For many businesses, the delay between delivering goods or services and customers paying their bills can cause real problems. 

It may leave you with a cash flow issue, lacking the funds to pay your own bills, or even to meet essential running costs such as wages. 

Or, it may get in the way of growing the business, because there is not enough financial headroom to serve more customers while waiting for existing customers to pay.

In either case, early payment discounts could help.

What is an early payment discount?

The principle is simple. If a customer pays their bill upfront, within an agreed time period, you knock a percentage off what is due. It may feel uncomfortable settling for a smaller sum than you would otherwise charge, but the value of getting the cash in early – and in full, rather than the customer paying in instalments over time – may more than justify the compromise.

Advantages and disadvantages of early payment discounts

The downside to offering an early payment discount is obvious. You’re supplying products or services at a lower price than you had originally intended. This will inevitably have an impact on your business’s profit margins – indeed, you will have to be careful to ensure that you can still make a profit, even after offering a discount.

However, offering these discounts can generate positive benefits too. They can be a really effective way to enhance your cash flows; that’s useful at any time, but in the current environment where late payments are an increasing problem for many businesses, it is particularly valuable. Rather than spending your time chasing an unpaid invoice, you can reinvest the money you receive straight back into your business.

Early payment discounts also reduce risk. Any unpaid invoice represents a risk to your business because there is always the possibility that it will never be settled, leaving a black hole in your accounts. And by working with customers in a position to pay your business on time, or even early, you can be confident about treating your own suppliers in the same way. 

You are likely to build more trusting relationships with both customers and suppliers – and you may even qualify for early repayment discounts of your own from the latter.

Bear in mind that early payment discounts come in all shapes and sizes. You may be able to negotiate different types of deals with key partners – your customers and your suppliers.

Alternatives to early payment discounts

The idea of an early payment discount is to unlock the value currently tied up in invoices waiting to be paid but invoice finance could be another way to achieve the same goal.

Invoice finance providers advance funds against the value of your invoices, effectively enabling you to get hold of the money straight away. The debt is repaid as customers settle their bills.

Invoice finance arrangements come in different forms. In some cases, you retain responsibility for the invoice and for chasing the customer for payment. In others, the lender essentially purchases your ledger, taking full responsibility for chasing payment.

Invoice finance can be a particularly good option in the current climate, where businesses’ margins are squeezed – you may be reluctant to lose any income by giving an early payment discount, but equally, you want to get the cash back into your business as soon as possible. Invoice finance fixes this problem.

Find out more about how to use and apply for invoice finance here.