Discounts For Early Invoice Payments, Do They Work?
I often get complaints from new clients that they offer discounts for early payments on invoices, however their customers either send a cheque on the due date (which obviously gives them up to seven extra days!) or simply pay late and deposit the discounted amount making it not worth your while to chase them for the rest.
It makes sense to have a written policy devised by the top management to state the time frame acceptable to make use of the cash discount or negotiate it on a case by case basis. The policy must also set a limit on the receivables that can be accumulated (credit limit).
Some customers simply go ahead and take a disallowed discount and assume you won’t bother chasing them, and when this happens, the company policy must notify that this customer will no longer receive cash discounts.
The company can set up an automated system that notifies the customer each time they take advantage of a disallowed discount. This company policy is sent to all customers in advance, describing the benefits and the consequences of misuse.
In some cases, companies charge the customer a late fee for delayed payments. This rate has to be carefully set, taking into account the regulation related to this (or allowed interest rates). The problem here, as with collections from large customers, is that they will just refuse to pay the late fee while releasing payments past the due date. In order to ensure that cash flow is maintained, these large customers must also be provided a copy of the management’s policy on credit terms, procedure for using cash discounts, etc.
In reality, sometimes when the situation turns delicate regarding sorting out late payments, etc. you may want to consider accepting credit card payments, as this will ensure that you will receive the payment in a couple of days. Of course, you will have to incur a fee for using the service, depending on your customer profile and volume of business. But if your customers are small businesses, you can easily work this cost into the sale price. On the other hand, if you charge late fees, you still have the problem of collecting on them, along with the balance already due, in addition to constantly reminding certain customers for payments. With a credit card payment, these issues are resolved.
Another alternative and often over looked one is using an invoice finance or invoice factoring facility. This way you receive your funds straight away from the finance company and don’t have to offer discounts to your customers anymore.
Often you will find that if you are offering a 3%-5% (sometimes up to 10%!) discount for early payments that this fee is more than you would have to pay a factoring company to receive money immediately on your invoices.
Ever had to hassle your customer for payment, you may relate to this funny clip: