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Leveraging early payment discounts to avoid customer defaults

On Behalf of | May 25, 2024 | Business Litigation

Managing your company’s cash flow and minimizing the risk of customer defaults are critical when it comes to maintaining your company’s financial health. 

Early payment discounts can be part of an effective strategy to achieve these goals. This incentive can encourage prompt payments, reduce the likelihood of a default and keep your invoices and cash flow predictable. 

What’s an early payment discount?

Generally, it’s just a percentage discount off a bill that is offered to customers who pay their bill within a specific period. For example, you could offer a “2/10, net 30” discount, which means your customer can take 2% off their bill if they pay their invoice within 10 days of issuance. If they don’t choose that option, then they owe the whole bill within 30 days.

Everybody loves a discount, so this tactic can actually foster some goodwill with your customers and even strengthen those relationships. If you offer this kind of discount and your competitors don’t, you also put yourself in a better position to bring in repeat business and gain a competitive edge.

Faster payments can also mean less time and resources spent on managing your account receivables. This easily translates into lower administrative costs associated with tracking down your debits, following up on missed bills and initiating collections. 

You can even selectively offer early payment discounts to certain customers. High-value clients and long-term customers with a good track record of payment might receive more favorable terms, while newer customers can be allowed to move into that select status through prompt payments or bigger investments in their orders. 

Unfortunately, no matter what you do, you may still have a customer or two who just won’t pay on time – or pay at all. When that happens, you may be forced to look into other debt collection processes to protect your own interests.