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Should you offer a discount for early payments?

Anyone in business will wince when they hear the words “aged receivables” or ” past due invoices”.

We’ve all been there. Clients are always in a rush to get their orders filled or services rendered, but when it comes to paying the invoice…not so much.

Suppliers want their invoices paid in a timely fashion but not at the cost of alienating a client.

The terms of payment usually appear on your credit application (more on that at a later date) and on your invoice and contract, if you have one. Standard terms for credit grantors as we all know is usually 30 days. We also all know that customers rarely pay before then and in most cases will pay well after the 30 days.

The solution?

One of the oldest and most accepted ways of motivating clients to pay sooner than later is by offering a discount on the invoice. Usually, it appears as a term on the invoice – 2%/10 Net 30.

Your customer can get a 2% discount on his bill if they pay in 10 days. Some only offer 1%.

QuickBooks on line offers some guidelines at:

They suggest you look at several factors:

Are your competitors offering a discount? If so how much?

What is the standard in the industry?

As they put it –

“If it’s industry standard to offer discounts or your competitors are offering them, then you may be doing yourself a disservice by not offering a discount. You should match your discount to your industry standard or your competitors’ terms, unless you offer some other advantage to customers (e.g. faster shipping or lower base prices).”

Has the client paid on time in the past?

“Your client’s payment history will also come into play. If you have a customer who already pays early, there may be no reason to offer them a discount. On the other hand, if your customer habitually pays late, this may incentivize them to pay early for a change.”

Still Not sure if this is for you?

Here are several good reasons it might be.:

You’ll get paid faster.

You’ll increase your working capital.

And most importantly you will avoid having a bad debt and possible write off. The longer you wait to get paid the higher the possibility you will not get paid at all.

So What’s next?

If you don’t have these numbers yet, review your accounts receivable and generate an aged list. That is, divide them into those clients that are current, those that are 30,60 and 90 days past due.

How many clients are in each category?

If most are current to 30 days you are doing really well.

If most are 30-60 days you are still doing pretty well but you may want to motivate them by offering a discount in the future.

You might want to add 1% or 2% /10 -net 30 to their invoices.

I recommend calling or emailing their accounts payable department and letting them know about this great opportunity for savings your company is offering them.

90 days plus

Generally, any accounts 90 days and over are a problem and need to be dealt with separately with a collection protocol.