Early Payment DiscountsPosted by Celeste
Some customers are lovely, they pay on time or even early; others are consistently behind with their payments. Perhaps you are considering some kind of discount policy to encourage more early birds. How should you go about doing it?
As a business person, you have probably borrowed money from a bank before. If you have a business line of credit, this counts.
Early payment discount example:
Your bill for $10,000 is due in 30 days. You decide to give a discount to customers who pay that bill within 15 days (or 15 days early). How big a discount should you give them. You need to figure out how much interest the bank would charge you to borrow that amount of money for that amount of time.
Take the rate at which you are able to borrow money from the bank (for this example, let’s say 10% or 0.1).
Now you want to figure out what your daily interest rate- not so hard:take your yearly rate and divide it by the number of days in a year: 0.1/365=0.000274
Multiply that by 15 days: 0.000274*15=0.00411 or 0.411%
0.411% of $10,000 is $41.10.
If you offer a discount of more than this amount to your customer for paying early, then it is costing you money. It may be worth it to you to provide that early payment discount. It may be unaffordable to you if your margins are slim.
Whether or not you decide to provide an early payment discount to your customers, you should do so knowing exactly how much it will cost you.
Do you provide an early payment discount to your customers? How did you decide the terms of this discount?