Many businesses offer discounts for early payment, but they don’t always know how to promote these discounts in a way that will encourage customers to take advantage of them.
There are a few key things to keep in mind when offering early payment discounts.
First, make sure that the discount is significant enough to be worthwhile for customers. A small discount may not be enough to persuade customers to change their payment habits.
Second, be clear about when the discount expires. Customers should have a reasonable amount of time to take advantage of the discount, but it’s important to set a clear cutoff date so that they don’t miss out.
Finally, make it easy for customers to take advantage of the discount by providing clear instructions on how to do so. By following these tips, you can ensure that your early payment discount is successful in attracting new business.
It can cause cash flow problems to allow clients to pay invoices within 30 to 60 days. It isn’t always possible for small businesses to wait months for a client to pay. In order to cover its own expenses, the company needs to be paid sooner.
However, clients generally prefer to be able to pay within four to eight weeks. It will improve their cash flow since they will be able to use your goods and services for free for a few weeks, one way to speed up payments is to offer early payments discounts.
How to calculate an early payment discount?
If you offer a discount in exchange for faster payment you may wonder how to calculate an early payment discount. This process can be a simple way to get clients to pay sooner. Canadian companies typically offer 2% discounts to their clients. Discounts vary by industry and may be negotiated. Ensure the quickest payment possible while negotiating the lowest discount.
For instance, you could give a client a 2% discount if they pay you in 10 days, or full price if they pay in 30 days. Invoices often indicate this discount as 2% / 10 Net 30. Depending on your situation, you may adjust the numbers.
Usual offers include:
- 2% / 10 net 45
- 2% / 10 net 60
- 1% / 10 net 30
How to improve cash flow in an easy and cost-effective manner
Cash flow can be improved easily using this method.
This method is simple to implement, and you can see results relatively quickly – usually within a few weeks. This is an excellent solution for companies that have minor cash flow issues. There are, however, some issues with the strategy. We will now run you through the three main problems.
Problem 1: It isn’t always reliable
This strategy is challenged by the fact that early payment is optional. It’s up to the client whether they want to take advantage of the discount. The check arrives before you know whether they are paying early. Even if you offer a discount, it won’t always make your cash flow more predictable. Financial difficulties are still possible, and you may encounter them.
Problem 2: Clients may take advantage of the discount and still pay later
You may encounter a problem with some clients who pay you on their usual terms (net 30) while still taking the discount. They have essentially gotten their discount for free. If that happens, you have very little recourse. You may lose your client relationship if you attempt to recover the funds.
Problem 3: Clients can sometimes renegotiate the contract
The quick payment discounts could also become permanent discounts, which would be a problem. Your clients may re-negotiate your contract and reduce the price by the discount amount.
Offer this option to your best clients
By offering this discount only to your best clients, you can minimize the chance of problems. It’s counterintuitive, but it works. Owners of small businesses may believe that offering a discount would encourage problem clients to pay. This is usually not the case. Sometimes, the opposite occurs. Clients who are “problems” may abuse the discount and still pay slowly (see the second problem).
Your best clients should receive this discount instead. These clients may have asked for longer terms (e.g., net 60) but always pay on time and without problems. Only offer the discount if the client has good credit. Dun & Bradstreet and Equifax provide commercial credit reports.
An alternative solution
Using financing may be beneficial if your company is experiencing cash flow problems due to slow-paying clients. Consider using solutions such as asset-based financing or invoice factoring, depending on the specific situation of your business.
Companies that can’t wait 30 to 60 days for payment can turn to factoring if they have financial problems. Factoring helps improve cash flow by funding invoices. For larger companies, however, asset-based lending is a more sophisticated solution. To improve liquidity, you can finance invoices and other assets (e.g., inventory, machinery).
Seasoned professional with a strong passion for the world of business finance. With over twenty years of dedicated experience in the field, my journey into the world of business finance began with a relentless curiosity for understanding the intricate workings of financial systems.