A common problem for many small and mid-sized companies is having to offer customers the option to pay an invoice in 30 – 60 days. Unfortunately, you have to offer net-30 day payment terms to clients if you want to remain competitive. If you don’t offer terms, your clients could choose to work with a competitor who is willing to offer payment terms.
Many businesses can’t afford to wait up to eight weeks for payment. They need the funds sooner so they can pay vendors, wages and other company expenses. This scenario creates a dilemma for business owners. Should they make the sale but risk cash flow problems? Or should they ask for an immediate payment and risk losing the customer? Neither option is good.
Early payment discounts
The simple solution to this problem is to offer early payment discounts to your clients. The mechanics of the process are easy. Your company offers the client a discount in exchange for payment in less than ten days.
The percentage that is discounted from the invoice varies and is negotiable. Some companies will agree to pay sooner if you offer a 2% discount. Others require a higher discount, such as 5%, to entice them to pay sooner.
Can you afford to offer discounts?
Keep in mind that the discount comes straight out of your profits. Therefore, make sure that your company can afford to provide the discount. This strategy works best for companies that have high profit margins.
If you cannot afford to offer payment discounts, consider other options such as working only with customers who pay quickly or using an overdraft.
Use early payment discounts selectively
Business owners often make the mistake of providing early payment discounts to any and every customer who is willing to take them. The problem with this strategy is that payment discounts can be misused. Certain customers will take the discount but still pay on the usual net 30- to 60-day terms. Furthermore, trying to recover the improper discount is difficult and can disrupt your client relationship. Ultimately, this approach defeats the purpose of providing incentives for early payment.
Instead, offer this benefit to only your best clients – those who pay on time and have been with your company for a while. If the client is new, review their commercial credit through a credit bureau such as VEDa or Dun & Bradstreet before offering a discount.
Problems with early payment discounts
One problem with this strategy is that early payments are unreliable. The discount and early payment are optional. Your client may – or may not – take it based on their circumstances.
The second problem is that some clients may use your willingness to provide a discount as a negotiation tool in the future. This tactic could affect your profit margins when your contracts are up for re-negotiation.
Debtor finance – an alternative to early payment discounts
A better way to handle net 30 terms is to use a debtor finance tool such as invoice factoring or invoice discounting. Both solutions allow you to finance slow-paying invoices from creditworthy commercial clients. Instead of waiting up to 60 days for payment, you get funds from the finance company. This funding allows you to offer payment terms while minimizing the consequences of slow-paying invoices.
Debtor finance has a number of advantages. The most important advantage is that it is specifically designed to solve cash flow problems due to slow-paying clients. It’s also more flexible than conventional business loans because the financing line adapts to your sales. Lastly, it’s easier to obtain than other solutions and can be set up quickly. These advantages make debtor finance an ideal solution for firms that are growing quickly and need funding.
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