Prompt Pay Discount
Wouldn’t it be nice if your high-value clients would pay their debts quickly, rather than waiting for the entire length of the terms of the sale or longer? For businesses struggling with cash flow, immediate infusions of capital through early payment can be lifesaving. The question here is how can you achieve that goal?
The answer is simple: use a prompt pay discount.
With the right steps, it’s possible to use payment discounts to boost cash flow, avoid bad debt and reduce risk, and even generate financial gains.
Of course, with slow to pay and non-paying clients, discounts may not help. In those instances, we can provide the professional debt collection solutions you need. Get in touch with us today to schedule your no-obligation consultation.
What Is a Prompt Pay Discount?
A prompt pay discount is nothing more than an offer to reduce a client’s total debt by a small amount in exchange for them paying sooner than they must. For instance, a client might have 30 days to pay their bill, but you offer them a discount of 1% if they pay it within 10 days.
The customer saves money, and your business enjoys an almost immediate infusion of cash. Of course, you lose 1% of the total bill, but this is often acceptable if it means getting the bulk of your money 20 days sooner than would otherwise be possible.
How to Use an Early Payment Discount as Part of Your Strategy
A prompt pay discount can provide a vital incentive for your clients, encouraging them to pay sooner. To get started, make a list of high-dollar receivables from your A/R system no more than 20 days old. Go through that list and remove any you feel don’t deserve an early payment discount offer. Finally, use your trade discount calculator (provided in Excel with Tutorial download) to determine your range of offers before calling each client.
How to Use a Prompt Pay Discount to Avoid Bad Debt and Lower Risk
In addition to using an early payment discount to increase the speed of client payments, you can also use them to avoid bad debt and reduce the risk your organization is exposed to. For instance, suppose you have a high-value invoice with a client, but you’ve learned that your customer is facing financial difficulties, and could file for bankruptcy soon. That spells serious danger for you because the average Chapter 11 recovery is under 15%.
As an unsecured creditor, you know that you’ll be at the bottom of the list for repayment in that situation, but you can use an early payment discount to jump to the head of the line. Simply calculate how much of a discount you can offer without erasing your profits and then offer it to your client.
Depending on the level of risk and bad debt exposure in question, you might want to offer 5% or even 10% in exchange for the client paying their debt immediately. The client benefits by reducing their debt load and freeing up capital for other needs and you benefit by avoiding the fallout of their bankruptcy filing.
Generate Financial Gains Using a Prompt Pay Discount
A prompt pay discount can help you accelerate cash flow and guard against risk. However, you can also use this tool to generate profits from your accounts receivable. You only need to use your trade discount calculator to find your breakeven point and practice with different verbal and written approaches.
For instance, suppose you have a $50,000 invoice that’s roughly one week old. You know that this customer usually drags their feet, regularly taking 60 days to pay. However, if your offer is accepted, you’ll receive your payment after just 11 days. With interest rates of 5% for the cost of funds, the breakeven discount is .68%, but when interest rates go up, your financial profit also rises dramatically. And with interest rates inching higher constantly, that’s good news for your financial situation.
Clients Who Just Won’t Pay
Of course, a prompt pay discount will only work in some situations. You may be dealing with a client who cannot pay promptly or even by the original terms of the contract. If you’re struggling with slow to pay or non-paying clients, we can help. Contact us today to schedule a no-obligation consultation and to learn more about our services.