Offering customers a discount for early payment of their invoices might sound like a good idea when cash flow is tight, but there are cheaper and more efficient ways of encouraging timely settlement of customer accounts.
If you are in the happy position of being able to wait three months for payment, there is nothing to stop you offering longer payment terms to a major customer in exchange for a larger order and/or a longer contract.
However, few businesses are able to wait 60 or 90 days for payment, especially in the current financial climate. So the focus should instead be on exploring all options for encouraging prompt payment on the agreed terms.
No time for freebies
There might be a case for offering early payment discounts if the only alternative was invoice finance and this proved to be more expensive, but why should you give away your hard earned profits just to get paid by the date that the customer agreed to in the first place?
If late payments are a concern, getting to know your customers (especially the larger ones) and building a relationship with them from the outset should make it easier to bring up issues with late payment without the need to offer incentives.
If possible, try and establish when your customers are in a stronger position to pay remaining debts, or if an alternative payment plan should be offered.
Because you’re worth it
Every business should be aware of the danger of devaluing their service. Customers who are offered discounts will be less likely to pay the original amount on time for future invoices as they may assume the discount has become the going rate and may even request further discounts.
Under late payment regulations, in every commercial transaction where a purchaser does not pay for goods or services by the relevant payment date, the supplier is entitled to interest on the amount outstanding until such time as payment is made.
If it is made clear from the outset that late payment compensation will be claimed if payments are overdue, there are no surprises and customers are often incentivised to pay within terms to avoid any additional costs.
Stay in control
Good financial discipline is the most effective way to minimise late payments. Clear terms and conditions, a robust process for chasing up late payers and accurate cash flow forecasts are the foundations for any business in dealing with payment issues.
Using a cloud-based accounting solution such as Big Red Cloud will make it easier to identify potential issues.
Invoice discounting might be acceptable in very specific circumstances, for example if you are trying to help a long term customer who has run into short term difficulties. But in most cases you would be better off spending that money on improving your credit control process.