Late payments are a concern for many entrepreneurs around the world.
In Italy, 50% of SMEs say they battle with late-paying customers. And it's the same in the UK (20%), France (27%), and Germany (18%).
How do you maintain being a business owner without sinking your company with an anchor of late payments?
Well, there are several methods entrepreneurs are using today. One of them is offering discounts for early payments.
But this isn't the only time you can offer discounts to your customers. In fact, we see companies using them in a myriad of scenarios.
Let's take a look at the different ways you can empower your business and its customers using discounts (the right way).
Early Payment Discounts
Since we started off on this note, we may as well begin here.
Early payment discounts are just as they sound -- you offer a discount to customers who pay you early. Now, this doesn't mean in advance, that's an entirely different category.
Let's say for example you have a customer on a Net 30 cycle. This means you give them 30 days from the date of the invoice to send their payment.
So you decide to offer a 2%/10 - Net 30 agreement, which means you'll give them a 2% discount if they pay you within 10 days or less.
If the customer is billed $1,000, then they'd save $20 by paying early.
Coming up with how much of a discount to offer is tricky. You'll have to consider your industry, competitors, and the timeliness of customers' past payments.
The most common options are:
- 1%10 - Net 30: This is a 1% discount for payments received within 10 days.
- 1%/15 - Net 30: This is a 1% discount for payments received within 15 days.
- 2%/10 - Net 30: This is a 2% discount for payments received within 10 days.
- 2%/15 - Net 30: This is a 2% discount for payments received within 15 days.
Now, you can set this up any way you want, and it's good to experiment. Of course, you want to ensure you're not taking too much away from your bottom line, so you remain profitable.
But is it a good idea to offer this discount to all of your customers? Well, you can -- but ideally, you want to save this for customers who are habitually late.
The customers who have no issues paying on time can continue doing so at 100% of your invoice rate.
The Benefits and Pitfalls
If you're worried about getting paid on time, offering early payment discounts can help prevent the issue. Customers are always looking to save money, no matter how small.
By offering this option, you can increase your chances of getting paid sooner. This is especially helpful if you're on a Net-30 and sometimes have to wait a whole month to get paid.
Ultimately, this strategy allows you to close gaps in your cash flow and boost your working capital.
Your customers also benefit by saving money, building their business credit, and improving rapport with vendors.
Unfortunately, it's not all roses and sunshine. Some issues may arise when using this method.
For instance, it can tighten your margins since you're reducing your business income. It's also not a good idea to offer this if you don't actually need the cash.
Tracking payments can also be time-consuming, which can reduce productivity and increase the chances of human error. Like giving discounts to the wrong clients.
Plus, there's no guarantee that customers will pay you early.
If your customers tend to pay on time, then there's no point to use early payment discounts.
Is it the Industry Standard?
This is important to know because if your competitors are offering early payment discounts, then you should too. Not doing so places them at an advantage, especially if your rates are equal to or higher than theirs.
Be sure to do a little research to see whether they offer discounts and how much. The idea is to match your discount with theirs, so you're on equal ground.
Offering a deeper discount will only hurt your profit margin even more.
Another option is to offer other incentives, such as faster shipping, bulk discounts, and so on.
Avoiding Potential Issues
It can be tricky managing early payment discounts, especially if you have many customers. This is why it's essential to have your terms in place.
Get this down in writing so they can read and sign it. This can help get everyone on the same page about when payments are due.
For example, you may mean payment is due 30 days from the time the project is completed and the customer may think it's 30 days from the invoice date.
It's critical to include this in your terms to clarify.
You don't want customers taking advantage of you because your terms aren't clear.
What About Invoice Factoring?
Let's say you're a vendor that uses invoice factoring to obtain working capital. If that's the case, then you can definitely benefit from early payment discounts.
How?
It can help you to save more money. With this, you're able to use your unpaid invoices and transfer them into cash.
In most cases, factoring companies demand that you have a minimum of $30K in invoices per month.
You won't get in without this level of monthly revenue. Another option -- if you're a smaller vendor or just want something more flexible -- is to use accounts receivable financing.
It's important to note that invoice factoring can help you save more money than early payment discounts.
So what are some of the other discount methods businesses can use?
Let's check them out.
Discount for Strategic Customers
There are certain customers you want to charge strategically. And by this, we mean offering lower prices in exchange for more business.
Let's say you landed a short-term contract with a large company. And there's a high possibility for larger higher-paying projects in the future.
It'd be a great idea to offer them a deeper discount for their first contract just to prove yourself.
It's also a good idea to do this even when there's a slim chance of getting ongoing work. But only if adding their project/brand to your portfolio can help you market your business and land more clients.
Discounts for Retaining Customers
If you're battling with customer retention, then it's a good idea to use discounts to prevent them from leaving.
These will typically come about through a negotiation process. So what you offer one customer will differ from the next.
For example, if you have a customer needing a set number of items per month, you can offer a bulk rate especially for them.
It's a good idea to use this method for larger customers who buy in large volumes. Otherwise, you're shooting your finances in the foot.
Discount for Instant Payment
This is the extreme version of the early payment discount. What makes this different is that you're asking customers to pay right away in exchange for a price cut.
If they don't, then they miss the "Deal of the day."
Doing this impulsively can get customers to react quickly to save money. So you wouldn't always offer this deal -- only at certain times.
This is an excellent way to increase cash flow for a month when things are slow or to offer incentives to customers to boost customer retention.
Discount for Future Purchase
Another way to get your customers returning is to offer a discount on a future purchase.
Somewhere on your invoice, you can include a visible coupon. For example, it can have the dashed lines to resemble an actual coupon.
Let them know to save the invoice or coupon code to receive the discount. It's a good idea to set a time limit on the discount, so it gets your customers to reorder soon.
Discount On a New Product
Have a new product in the pipeline or that recently launched? Then you can raise awareness by offering a discount to customers who'd be interested in purchasing it (based on their industry and purchasing history).
You can use the discount to entice customers to pre-order, If there's limited availability, you can mention this to create a sense of urgency.
Just place the promotion on your invoice so customers can plan ahead for their next purchase.
Tempting Customers with Enticing Discounts
As a business owner, you have to come up with smart and efficient ways to keep cash flowing in. If this means coming up with discounts -- then so be it.
Try using some of the above ideas to counter late-payers and flaky customers. It’s also advised that you find a reputable digital invoicing platform like invoicely to better manage payments owed.
Have other ideas for discounts to offer customers? Let us know about them in the comments!