Late payment of invoices is a significant problem for many businesses in the UK, affecting various companies of all sizes and across all industries.
There are numerous reasons why payments are delayed, from forgotten, lost, not received, and even for some, to save money.
However, there are penalties (your credit team should have these in place) for late payment, which, in most cases, businesses will try to avoid.
To incentivise payment on time and even achieve early payment, you could look to introduce early payment discounts, which we’ll look at in more detail throughout this post.
At Direct Route Ltd, we can help you with any outstanding invoices and late payments, working with your credit team to successfully retrieve monies owed, contact us today to find out more.
What is early payment discount?
Early payment discount is when you might offer a business a small discount off their total invoice amount if they settle their bill in full earlier than the payment due date.
Early payment discount definition – also known as a cash discount or prompt payment discount is a form of trade finance that can vary depending on how early a business is paid.
How to use early payment discount
Early payment discounts are set and agreed by you. For example, you choose how many days early discount can be applied.
For example, you could choose 3/15 Net 30 – this term means the invoice must be paid in full within 30 days. However, the customer will be entitled to a 3% discount (off the total amount owed) if the invoice is paid within 15 days.
This type of early discounting is known as a static discount. It is set at the beginning and is non-negotiable.
There are also sliding scale discounts, where the amount owed is adjusted depending on the actual pay date, with the adjustment made on set days. It is a sliding scale percentage (APR) in which the discount varies depending on when payment is made, ie xx% discount in xx days, then xx% in xx days, and so on.
The benefit of sliding scale discounts is that you have control over extending early payment discount opportunities to your customers.
Dynamic discounts are also used, but they aren’t as popular as static or sliding discounts, as pricing is determined by supply and demand, making them more challenging to manage.
How to ensure early payment discounts work for your business:
- Set clear terms and conditions from the outset and include these, as well as late payment penalties, in your payment terms.
- Communicate clearly with your customers and be open and transparent with all payment terms and conditions.
- Look to tailor discounts and discount types to your industry and customer base – what are your customers used to? What do they know? What will work for your business?
- Monitor your cash flow rigorously and use automation, where appropriate, to support sending reminders, issuing statements, etc.
- Work with a professional debt recovery team to support your credit function with the successful collection of overdue invoices.
When to use early payment discount?
To help support you with your cash flow and working capital, early payment discounts can be a great solution. Encouraging buyers to settle their invoices early, early payment discounts should be used as a strategic tool where you define your discount rate (what is sustainable for your business), communicate your payment terms clearly and transparently, calculate the discount amount, and outline the net payment after discount.
When to use EPD:
- When you need an injection of revenue sooner.
- When the risks of late payment are high.
- To help reduce commercial debt recovery.
- To build stronger and long-lasting business relationships.
Benefits of early payment discount
- It can benefit both accounts receivable and accounts payable, helping to support your bottom line.
- By offering your customers the opportunity for early payment discounts, vendors may then extend this option to you.
- You can build better business relationships with your customers.
- You can get paid faster, reducing the risk of late payments of commercial debts.
- It can help to conserve working capital.
- Helps to improve profit margins and replenish cash flow.
- It can help you forecast cash flow more accurately.
- Help you to become more sustainable.
Challenges with early payment discount
- Some customers will pay the discounted amount without paying within the discount set days.
- Income is now not predictable and can vary – your credit team will need to track payments extremely carefully.
- Customers will pay less than the full invoice amount; therefore, this must be factored into your forecasting.
Commercial debt recovery
The longer you wait to get paid, the riskier it becomes; hence, being in a position to offer early payment discounts can be incredibly beneficial and a win-win for both parties.
Early payment discounts can be challenging to implement and track, but the benefits they offer, starting with the reduction in the risk of commercial debt building, are significant.
At Direct Route, our team works with you to support your credit control processes and your business in the collection of overdue invoices and late payments of commercial debt.
To find out more, contact us today and see how we can help you.