Is using early settlement discounts really right for your business?

I was recently asked about early settlement discounts and what my views on it are. Don’t get me wrong, offering an early settlement discount on your invoices does have its place but you also need to be very, careful.

You need to ensure that if you offer an early settlement discount you understand the implications of what can happen.

Yes. Your good customers. The ones who always pay you on time, will continue to pay you on time. You may have a couple of people who pay you on time and take the discount but then you’ll have those customers who will pay you late and also take the discount.

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These are the customer you need to think about before you put an early discount in place. The reason being, when they take this discount, it’s going to leave you with £10 or £20 debts here and there, dotted over your ledgers. Are you going to take the time chasing these amounts or are you just going to write them off?

If you’re going to write them off then it’s not an early settlement discount, you are discounting your product or service. You are devaluing you and your time.

You need to consider and think about what you will do with people who take an early settlement when it’s not in their right to do it. Are you prepared to lose this money or is there a better way?

Personally, I don’t recommend offering early settlement discounts. I would leave it up to your customers to ring you and say, “If I paid this invoice today, how much of a discount would you give me?”

Then have a figure in mind you would offer as the early settlement discount and give them that figure.

But don’t put it as standard on your invoice unless you’re prepared to chase small amounts or write them off.

It’s completely up to you which one you choose but that’s my recommendation.

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