However, using discounts instead of factoring is only possible if your customers already support an early payment program. Factoring agreements also tend to be confusing and written to keep you locked in. But as long as your customers offer early payment programs, you can use both — and you’ll likely save more money than using factoring alone.
The problem is that the effective interest rate the company is offering to its customers through a discount deal is extremely high. An interest rate of two percent for twenty days equates to an annualized rate of about 36 percent. The seller should be able to obtain less-expensive debt from some other source than paying this amount through its early payment discount deals. An early payment discount is a form early payment discount accounting of trade finance, allowing buyers to pay a discounted amount to suppliers in exchange for settling invoices before their maturity date. Also known as a prompt payment discount or early settlement discount, it’s typically calculated as a percentage of the goods and services purchased. An early payment discount is a (typically small) price cut that customers enjoy when they pay their bills before the due date.
Using C2FO’s Early Payment Discount: The Difference Between an APR Offer and a Discount Offer
With 2/10 net 30, for example, the customer would have to pay within 10 days. In a sliding scale framework, they could still claim a discount at the 13th or 16th day. This is one of the most frustrating scenarios for business owners.
Next, they need to subtract the discount amount from the total amount due. For example, say you regularly sell to a shop called Donna’s Donuts. Although she’s a good customer, Donna always waits until the very last minute to pay her bill.
Traditional Early Payments vs. On-Demand Early Payments: What’s the Difference?
For example, you can set the rate you are willing to pay to receive early payment with C2FO’s Name Your Rate®. If you want to avoid the cost of discounts altogether, the C2FO CashFlow+™ Card, allows you to get early payment in full and receive 1% cash back on all purchases made with the card. Dynamic discounts give you the flexibility to offer a discount rate that makes sense for your business rather than accepting a static rate set by your customer. Some early payment programs offer additional products that give you more control over your rates and discounts. With sliding scale discounts, the discount is adjusted based on the customer’s actual pay date — the sooner they pay, the bigger the discount.
Prompt payment discounts (also known as settlement or cash discounts) are offered to credit customers to encourage prompt payment of their account. It is not guaranteed that customers will take advantage of prompt payment discounts at the point of sale as it is dependent upon whether or not the credit customer pays within the settlement window. To encourage customers to settle their invoices early and improve cash flow, many business owners offer an incentive.
What is a Sales Discount?
Because the Sales Discounts account is decreasing the revenue your business earns, you need to deduct the total from your business’s gross revenue at the end of the period. Like any transaction, you must create journal entries reflecting early payment discounts. Canada’s BDC Bank offers some simple, back-of-envelope calculations to help assess whether an early payment discount is financially savvy.