Early payment discounts – The secret to getting paid on time?

As a small business, ensuring consistent cash flow is one of your key considerations. So how do you get your clients to pay on time?

One option to consider is early payment discounts, specifically designed to encourage customers to clear outstanding debts quickly. At the most basic level, customers who pay invoices before the due date receive a small discount on the total bill. Customers who choose to pay on, or after, the deadline receive no discount and are charged the full amount.

Although discounts are attractive to customers and should help to boost cashflow, there is an obvious problem – a slightly reduced profit margin. Before offering invoice discounts to clients it is essential to consider whether you can actually afford to take a hit on your profits. This will also help you decide just how big a discount to offer, because you cannot easily raise prices to cover the shortfall.

Early payment discounts are actually a double-edged sword. You don’t want to lose too much of your profit margin, but equally your customers will need a reasonable discount to push your invoices through the system quicker. It is absolutely crucial that you consider the wider implications before instituting such a discount system; your cashflow may be improved, but it will also be worth fractionally less than normal.

Early payment discounts are a useful option, but it may not be right for you. If you need to improve cashflow, speak to your accountant about whether discounts can help, or whether there are other options to consider.