Early Payment Discounts: Should You Use Them in Your Business?
- September 22, 2021
- Posted by: Funmilola Sanya
- Category: Business Finance
Early payment discount, commonly referred to as cash discounts or prompt payment discounts is a form of trade finance where the buyer pays less than the full invoice amount due by paying the supplier earlier than the invoice maturity date as opposed to spreading the cost and paying at a later date. In early payment discounts, vendors offer their buyers a discount on their outstanding invoices as an incentive to open their wallets sooner. This way, the business has a steady cash flow and the customer secures cost savings at cheaper affordable rates of products and services. This win-win arrangement has proven to be of great benefit to the business in so many ways. If you are looking for ways to reward your customers while keeping a steady cash flow, consider offering them an early payment discount.
When you should offer early payment discount
Giving your customers a price cut to make them fulfill their payment liabilities may seem like the perfect way to manage your clients’ payments and establish a cash reserve for your business, but it may not always be beneficial to offer early payment discounts to your customers. If your business is suffering from cash flow problems or lacks a large cash reserve that’s enough to cover expenses, then you shouldn’t consider early payment discounts. If it isn’t, then there are times early payment discounts will be perfect for your business! Below are when early payments are worth considering:
- When you want to increase your cash flow: Inadequate cash flow is one of the major reasons businesses fail. Any business that lacks cash reserve, thereby operating with a negative cash flow, will sooner than later run into debts and eventually crumble. The success of a business is hinged on its ability to maintain a positive cash flow. Improving your cash flow through early payment discounts is easy to set up, and it doesn’t require a lot of work. If you offer customers a discount, and they can pay their bills ahead of time, you will get your cash early, which helps regulate and stimulates your cash flow.
- When you want to build a strong customer base: Everyone loves an incentive, and if you offer early payment discounts to customers – whether old or new – you’ll be strengthening your customer relationship and encouraging repeat purchases. As a business, it is of utmost importance that you find strategic ways to ensure you get repeat purchases from your existing customers and make. Early payment discounts will not only help you boost repeat purchases but will also keep up your customer loyalty. Early payment discounts should be offered to trustworthy clients, of course.
The benefits of early discounts to your business:
- Enhances customer relationships and loyalty.
- Quick returns.
- Builds up sales momentum.
- Increases working capital.
- Accurate cashflow forecast.
- Access to a staedy cash flow anytime when needed.
- Increases your cash inflow.
- Encourages customers to pay their bills, even sooner.
- Mitigates supply chain risks.
Who should get early payment discounts?
If you are looking to expand your small business and increase your cash flow, offering your customers/clients an incentive to pay quickly is an effective way to achieve your expansion and cash flow goals. However, it is highly recommended that you offer this incentive to your best clients/customers. Early payment discounts can be seen as an attractive deal for the customers but should be only offered to customers who value your services and have your business’ interest in heart.
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