When and How to Offer Discounts for Early Payment
This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
Offering discounts for cash, upfront and early payment can be an integral part of a comprehensive business management strategy, not just the domain of the accounts receivable department. To find creative ways of getting paid earlier than the standard net 30, I spoke with two business owners who are taking proactive stances to cash-flow management.
Mary Davis of Interior Images, Inc. in Cocoa, Florida and Jeff Finkelstein of Customer Paradigm in Boulder, Colorado kindly told me about their approaches to offering discounts to customers as an incentive to pay earlier. Both run project-based businesses: Davis commands a company that supplies flooring products and installations to homeowners and commercial accounts; Finkelstein heads a web development and marketing company that creates websites and marketing campaigns for commercial accounts that include Fortune 500 corporations.
They gave me ideas for speeding up cash flow, primarily by offering prepayment and early-payment incentives to their customers.
1. Place pricing and payment terms in the sales contract.
Introduce the options of pre- and early-pay discounts early, rather than putting payment options on invoices. By bringing up the cash-flow topic in early discussions, customers have the time to consider and commit to payment terms that are most favorable to them.
2. Recognize that customers take risks by paying early.
Customers lose the leverage of withholding payments until they are satisfied when they pay before a project is completed. By delivering on their promises and building favorable reputations in their respective business communities, Davis and Finkelstein have customers who trust their companies and are willing to take some risks in order to get discounts.
3. Get a deposit.
The deposit is integral to preserving cash position, especially for Davis as she needs to fund flooring product purchases, but can serve additional purposes that benefit cash flow.
By charging a deposit, your company also initiates the process of getting set up as a vendor in customers’ accounts payable systems. Finkelstein tells me that his Fortune 500 clients may take up to four weeks to process a first invoice but that subsequent invoices are typically paid much faster.
4. Take credit cards.
Both Interior Images and Customer Paradigm accept this form of payment, allowing them to get immediate payment (though they do have to pay merchant fees). Davis also mentions that payment by credit card mitigates the customer’s risk associated with upfront payment, and she encourages this method for customers unfamiliar with her company.
5. Encourage the payment method that works best for your company.
Davis and Finkelstein have different philosophies about discounts associated with credit card payments: Davis often offers discounts for cash payments, passing along card-fee savings to customers whereas Finkelstein may give discounts for card payments. The difference is that Davis’s customers can often hand her a check immediately whereas Finkelstein’s customers are typically businesses with a slower accounting process that adds days to payment by check.
6. Look everywhere for ways to speed up and improve cash flow.
Neither owner has isolated cash flow matters to the realm of accounting. Davis negotiates early-pay discounts with her product suppliers and subcontractors, and consolidates loads from vendors to minimize freight charges, further reducing her costs and improving cash position. Finkelstein installed an in-house project management system that accelerated the close-out and billing of projects, which has sped cash flow significantly.
Bring up cash-flow discussions early, align your business processes with the customer’s payment methods, and be mindful of customer’s preferences without sacrificing your company’s operating needs.
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