Early Payment Discounts – What option is right for you?

Our second installment in our financing series.

We all know the saying that time is money.   As a supplier, when it comes to managing your cash flow, it is especially true.  These days, the cost of cash for small and mid-sized businesses can range between 8% and 18%.  As a growing business, you need money to invest in products, people, and customers.  Not interest payments.  It might be time to consider early payment discounts as a way to increase your liquidity. 

Early payment discounts, also called prompt payment or early settlement discounts, are a way to incent your buyer to pay you sooner.  The quicker the cash comes in, the faster you can redeploy it into your business.   Early payment discounts can improve cash flow without incurring high-interest debt. They can lower your DSOs, and can be used strategically to bridge cash debts during times when you need working capital the most. 

In this earlier blog, we discussed when to consider early payment options.  Now we are going to  review  two different ways to structure early pay discounts:

Static Discounts

Static discounts are pre-defined early payment terms. They typically show up on invoices as “2/10 Net 30”.  That translates into “Pay me in under ten days, and you’ll get a 2% discount” Typically, the discount ranges from 1 – 2% with terms that range from 30 – 60 days.  These discounts are called “static” because you are offering the same deal to all of your customers.

Dynamic Discounts

Dynamic discounting is a more collaborative approach. Your customer defines the APR (Annual Percentage Rate) based on when they choose to pay you.  The sooner they pay, the higher the discount.  This approach allows your customer to leverage your payment to meet their capital needs.  It can be a win/win if appropriately managed.  

Three Factors to Consider When Implementing Early Payment Discounts (EPD)

On paper, early payment discounts look like a strategically sound way to get more capital into your business quickly.  However, there several elements to consider:

  1. When:  How do you decide when it is the right time to offer EPD?  Typically, if the discount will cost you less than the interest on borrowing from an institutional lender, the discount is a better option. 
  2. Who: If you have a limited number of customers, then identifying buyers interested in this kind of program is a simple part of the sales process.  However, if you have multiple buyers, this customized approach can be challenging to scale.  
  3. How: Managing different payment terms can be complicated for a small accounting team.   They will need a consistent process to track what terms have been negotiated for which customer.

Payment management technology platforms, like Coupa Early Pay Discounts provide an easy way to track and manage multiple payment terms. This type of platform provides suppliers with flexible digital tools to create and manage purchase orders, invoices, and cash needs. By seamlessly integrating payment terms into invoices, early pay platforms provide a simple way to control your working capital.

To learn more about how you can use payment terms to help finance your growth check out this article, view this video, or contact our experts at accelerate@coupa.com.