Ever think it’s challenging to get clients to pay? The answer is probably an emphatic yes if you operate a business and issue invoices to clients. Many clients postpone payment until the due day. Even after the deadline has gone, other consumers continue to withhold payment. Additionally, if your company is short on funds, you might think about providing an early payment discount.

So, what is a discount for making a quick payment? Will rewarding it benefit or harm your company? Learn more below.

What is an early payment discount?

Early payment discounts are offered to customers who pay their bills on time and earn (often small) price reductions. Additional names for this form of savings include a cash discount, quick payment discount, or sales discount.

If you extend credit to your customers, you almost certainly send them an invoice that includes details about how to pay, when payments are due, and other things. Due to the fact that invoices provide customers with a window of time (between 30 and 60 days) to pay their bills, many businesses offer an early payment discount to speed up payments.

Your early payment discount terms can be on the invoice. Customers may also be informed of the deal at the point of purchase. They can thus begin planning their budget for the payment before they even receive their invoice.

Early payment discounts’ benefits

Why therefore should you consider offering discounts to clients who make on-time payments on their bills? Here are some benefits customers may receive discounts for paying in advance if you:

• Increase cash flow
• Encourage timely or delayed payments
• Strengthen relationships 
• boost customer loyalty

Different Kinds of Early Payment Discounts

Early payment discounts’ are typically available in three varieties: static, sliding scale, and dynamic, with each offering varying degrees of flexibility. A company’s customer base may be served by one or several models.

Static: Static EPD discounts offer a predefined discount for invoices paid within a certain number of days. It is the least flexible but most straightforward EPD type and may be used in limited circumstances, such as to augment a quarterly financial report with a set date. 

On a $2,000 invoice, for example, a 2/10 – net 30 EPD indicates that the customer has 10 days to pay to save 2%, or $40, off the total amount. If they do not, they have 30 days to pay the full amount.

Sliding scale: A sliding scale EPD adjusts the discount based on when the invoice is paid; the longer it takes, the lower the discount. This is commonly used to reduce DSO or late payments throughout the year. 

For example, the same $2,000 invoice may be eligible for a 2% discount if paid at the moment of purchase (day 0), as well as a 0.4% reduction every 6 days. Day 10 would be discounted by 1.33%, Day 15 would be discounted by 1%, and Day 20 would be discounted by 0.67%.

Dynamic: Dynamic discounting allows terms to be negotiated between the buyer and the supplier. Although this process takes longer, it is influenced by supply and demand. 

For example, the consumer could request a 1.5% discount on the $2,000 bill. Although the supplier may agree, payment must be received within 15 days of the invoice date.

How should you write a discount for early payment on your invoice?

You must incorporate the early payment discount in your invoice in a specific way. However, before doing that, you must be familiar with an invoice’s components. Invoices often follow a set format. The following details should be on your invoice.

• Invoice date
• Customer information
• Seller information
• Purchased goods or services
• Total amount due
• Payment terms 
• Invoice number

Your early payment incentive is disclosed in the payment terms. Write the percentage discount the customer will receive, followed by the number of days they must pay to earn this discount, in the terms of your early payment discount. Next, type the customary due date.

Consider the scenario where you wish to offer consumers a 2% discount if they pay their invoices within 10 days as opposed to the anticipated 30-day due date. You would write 2/10, Net 30 on the invoice.

An example of an invoice with an early payment discount

Here are a few further samples of typical early payment discount choices:

1/10, Net 30	1% discount for payments made within 10 days; 30-day due date
2/15, Net 45	2% discount for payments made within 15 days; 45-day due date
4/10, Net 60	4% discount for payments made within 10 days; 60-day due date

Early payment discount formula 

It’s simple to figure out an invoice early payment discount, but it does need some math (unless you use accounting software).

To get the customer’s discount amount, apply the following early payment discount formula:  

Early Payment Discount = Discount Percentage X Invoice Total 

Early payment discount example 

Let’s examine a case in point. Let’s say you provide a $500 total invoiced customer with a 2% early payment incentive. Plug your numbers into the following formula to determine the monetary amount of the discount:

Early Payment Discount = 2% X $500

Early Payment Discount = $10

Would you like to know how much the client owes you after the discount? 

To calculate their overall invoice due after the discount, use the formula below:

Discounted Invoice = Total Invoice – (Discount Percentage X Invoice Total)

The formula below can be used to get the discounted invoice total using the same values from the example before (2% discount and $500 invoice):

Invoice with Discount = $500 – (2% X $500)

Invoice with Discount = $490

The consumer would owe $490 as opposed to the original $500 invoice amount after a 2% discount.

How much of a discount should you offer?

Your profit margins will be razor-thin if you provide an excessively large discount. In addition, you want the discount to be strong enough to encourage clients who desire to make early payments. 

What amount should you propose?

Find the profit margin for your goods or service to help you decide how much to discount it. Use the following formula to achieve that:

Profit Margin = [(Product Price – Cost of Goods Sold) / Product Price] X 100

Add up all of your costs associated with producing the goods or providing the service to determine your cost of goods sold (COGS). The difference will then be calculated by deducting those expenses from the price of your product. The final step is to multiply that result (the product price less the cost of goods sold) by 100 after dividing it by the product price. This demonstrates the portion of your profits that you keep.

Calculate your profit margin sans the discount for early payment. Then, you can experiment with other discount possibilities to see whether you can generate a profit margin that is large enough.

Consider your industry standards and competition while determining your cash discount. Ascertain the prices that competing companies charge for comparable services or goods. If you want to remain competitive, you can decide to provide a low enough early payment discount. 

Make sure you provide yourself with wiggle room to pay expenses and turn a healthy profit. You don’t want the discount to put your company in financial trouble.

Quick suggestions for providing a discount for early payments

Again, giving customers a discount for on-time payments can encourage early bill payment, increase cash flow, and improve customer relations.

However, you should first:

• Before adding an arbitrary discount value, check your profit margin.
• Make the appropriate entry in your books.
• To make the procedure more efficient, use accounting software.
• Make sure customers are aware you offer a prompt payment discount

Do you send invoices regularly? With SpurtCloud’s online platform, you can create invoices, apply for an early payment discount, and track unpaid invoices with ease.