How early settlement discounts can help your business
According to our research, one in nine (11%) businesses currently use early settlement discounts to encourage their customers to pay sooner.
Offering a discount to customers who pay early may seem counter-productive but, in many cases, it can be financially beneficial.
The nature of trading on credit terms means there will always be a cash flow gap between providing a service and getting paid. So it’s vital to explore your options to bridge that gap and keep cash flowing freely through your business at all times.
Early settlement discounts provide an incentive for customers to pay up promptly, ensuring you get the money you’re owed within terms.
Whilst this means you would get paid slightly less, it can be more beneficial to your business to be paid the majority of an invoice’s value early than it is to receive the full amount outside of terms.
Depending on the impact it has on your credit control, the early settlement discount could become part of your business’s pricing structure going forward. The discount you offer doesn’t need to be excessive, just enough to encourage customers to make payment within terms. Typically, early settlement discounts are approximately 2.5%.
When using this incentive it’s important to make sure that it is clearly stated on every invoice. To avoid confusion and potential disputes it is best practice to provide the figure your customer would be saving by paying early in a prominent position.
If offering early settlement discounts to all of your customers seems like a step too far, you could be selective with who you offer these terms to. Perhaps just offering persistently bad payers with this incentive could be more beneficial, as it is often these customers that need a push to pay within terms.
Or an alternative option could be to enter all your customers that pay within a specific timeframe into a competition. This will encourage prompt payment and it could also improve your customer relations and encourage repeat purchases.
As well as providing cash flow benefits, any customer taking advantage of the offer is one less account your credit control team has to worry about. And with much of the time businesses spend on credit control being consumed chasing overdue debt, this is an advantage that cannot be ignored.
You should also be aware that HM Revenue and Customs (HMRC) recently changed legislation regarding early settlement discounts.
Until 1st April 2015, suppliers offering early settlement discounts were able to put on their invoice, and account for, the VAT due on the discounted price, even if the full price (i.e. the undiscounted amount) was subsequently paid. Customers receiving early settlement discount offers may only recover as input tax, the VAT stated on the invoice.
But the changes mean that suppliers must account for VAT on the amount they actually receive and customers may recover the amount of VAT that is actually paid to the supplier.
Do you offer early settlement discounts? We’d love to hear what impact it has had on your business. Please share your experiences in the comments below.