Cash Discount

Offering a cash discount brings up the question of “Would you rather have full payment from someone who owes you money within 30 days, or be paid a little less, but within 10 days?”

If you are like many small businesses, cash flow is a major issue. If they can be paid early from a customer it is well worth it to offer a cash discount. The most common cash discount offer is a 2% discount if the invoice is paid in ten days; otherwise, the full amount would need to be paid in 30 days. It would be noted on the invoice as 2%/10 – Net 30. So if you owe $2,000 to someone and decide to take the 2% discount and pay within ten days, you would only pay $1,960. Of course, there are always those annoying customers who take the 2% discount and then pay in 30 days.

How does a business decide how much of a discount to offer? First they should look at what the competition is offering and perhaps do the same. Or try to find out what the industry standard is by asking around at a local trade association meeting. If your customer has always paid on time (or even early) in the past, or the amount owed is very small, there may be no need to offer a discount. But if you have customers who always pay late, this may help incentivize them to pay on time. The longer you give them, the more things could happen to deplete their ability to pay their bills. The vendor should also clearly define when the clocks starts ticking—is it from the date of the invoice or when the customer receives it?

If a business is truly desperate for cash from their accounts receivable, they can sell them to a factoring company. They will get immediate payment, but at quite a loss. It would be much more advantageous to offer a cash discount for early payments directly to their customers.

Besides saving money, customers benefit from paying early, as vendors can leave notes on their credit ratings that they always pay on time or before the due date. Also, they're building a better relationship with the vendor, who may be willing to extend even more generous credit terms over time.

Now if only the IRS would give a cash discount to those who pay before April 15. Dream on.