How to Offer Early Payment Discounts – 2% / 10 Net 30

One of the problems of allowing clients to pay invoices in 30 to 60 days is that it can lead to cash flow problems. A small business can’t always afford to wait a month or two for a client payment. The business needs to get paid sooner in order pay for its own expenses.

However, clients like the option of being able to pay you in four to eight weeks. It allows them to use your goods and services for free for a few weeks – which improves their cash flow.

A simple solution: Offer a discount for an early payment

A simple way to get clients to pay sooner is to offer them a discount in exchange for a faster payment. In Canada, companies usually offer a 2% discount to their clients. However, discounts can be negotiable and vary by industry. Your objective is to negotiate the lowest discount in exchange for the fastest payment.

For example, you could offer a client a 2% discount if they pay you within 10 days, or pay full price if they pay in 30 days. This discount is often noted on the invoice as 2% / 10 Net 30. However, you can adjust the numbers to suit your situation.

Common offers include:

  • 2% / 10 net 45
  • 2% / 10 net 60
  • 1% / 10 net 30

An easy and cost-effective way to improve cash flow

This method offers a simple way to improve your cash flow. It’s easy to implement and you can see the benefits fairly quickly – usually in weeks. Companies that have minor cash flow problems should consider implementing this plan. However, the strategy is not perfect: it can present some problems.

Problem #1: Not always reliable

The main challenge with this strategy is that the early payment is optional. Clients get to choose whether to pay early with the discount. Unfortunately, you never know if they are paying early until the check arrives. While offering a discount improves your cash flow, it doesn’t always make it more predictable. Unfortunately, you could still encounter financial problems.

Problem #2: Clients may take the discount and pay later

A common problem with some clients is that they may keep paying you on their usual terms (e.g., net 30) but still take the discount. Basically, you have given them a free discount. You have very little recourse if this happens. Trying to recover the funds can be difficult and may affect your client relationship.

Problem #3: Clients may renegotiate the contract

Another problem is that there is a risk that the quick payment discounts could become permanent discounts. Some clients may be inclined to reduce your price by the amount of the discount once your contract comes up for re-negotiation.

Offer this option to your best clients

One easy way to minimize the chance of problems is to offer this discount to your best clients only. This approach may seem counter-intuitive. Some business owners may think that a discount could improve payments from problem clients. This assumption is usually wrong. In fact, the opposite may happen. Your “problem” clients may abuse the discount and still pay slowly (see Problem #2).

Instead, offer this discount to your best clients. These clients may have asked for longer terms (e.g., net 60) but always pay on time and without problems. Consider offering the discount only to clients who have good commercial credit. You can review commercial credit reports through Dun & Bradstreet and Equifax.

An alternative solution

If your company has cash flow problems due to slow-paying clients, you may benefit from using financing. Depending on the specific situation of your business, consider using a solution such as invoice factoring or asset based financing.

Factoring can help small companies that have financial problems because they can’t afford to wait 30 to 60 days to get paid. The factor finances your invoices, which improves your cash flow. Asset based lending, on the other hand, is a more sophisticated solution that works well for larger companies. This solution allows you to finance invoices and other assets (e.g., inventory, machinery, etc.) in order to improve your liquidity.

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