Early Payment Discount, a virtuous circle with multiple benefits
Published on 29 June 2022
As late payments accumulate in times of crisis, the Early Payment Discount appears to be a valuable tool to limit risks, optimize equity or fluidify cash flow... whether you are a customer or supplier. Here are some explanations.
What is the Early Payment Discount?
Early Payment Discount is a payment method in which the customer pays the supplier before the due date in exchange for a reduction (expressed as a %) of the total invoice amount.
This type of advance payment can be offered by the customer as well as the supplier. The only condition for its existence is that its terms (payment period, discount rate) are clearly mentioned on the invoice and in the general sales conditions (GSC).
Important point, the anticipated payment thus envisaged is not obligatory: it is an option which encourages the customer to pay more quickly, but which leaves him free to do it later (within the legal time limits) without profiting from the discount.
What are the legal payment terms?
By default, the maximum payment term set by law is 30 days following receipt of the goods or performance of the service. Special clauses agreed between the parties may increase this to 60 days or 45 days end of month from the date of issue of the invoice.
Advance payment terms can be freely set, including on the first day. It is even possible to provide for a degressive discount rate, reducing the discount granted for each day that passes after receipt of the invoice.
What are the advantages of the Early Payment Discount?
- Improve the company's margins.
If your main objective is to reduce your costs, it is obvious that the discount granted by your supplier will help improve your company's margins. Any discount is a good one.
- Optimize your equity... or your lack of cash.
If the discount negotiated with your supplier approaches or exceeds the returns you could have expected from other financial products in the same time frame, the Early Payment Discount can also be seen as a very advantageous way to optimize your equity. Few financial products will appear to you as safe and profitable, with the added advantage of being in cash.
On the other hand, if you do not have the necessary funds to pay your supplier quickly, you might be tempted to take advantage of the discount to finance your advance payment with a bank loan. The success of this form of factoring, however, is based on an interest rate lower than the discount rate, which will have to be negotiated skilfully with the banks and the supplier.
There are tools that facilitate this search for advantageous interest rates and discount opportunities. This is the case of Generix AP Automation (a solution integrated to Generix Invoices Services), which allows both the automation of invoice management and the search for innovative discount or financing programs.
For a supplier, the advantage of the Early Payment Discount is to encourage his customers to pay him more quickly and thus to fluidify his cash flow and minimize his working capital needs. This reduces the risks:
- late payment or non-payment, which can lead the supplier to default on payment;
- having to manage a backlog of invoices, for example in the case of a peak in activity or a difficult economic context in its customer ecosystem.
Customer AND supplier side
Finally, the Early Payment Discount makes it possible to establish a relationship of trust between a customer (who wants to reassure himself about his ability to pay on time) and a supplier (who may have an interest in proposing a discount rather than other less attractive commercial reductions).
Indeed, when suppliers have made the effort to negotiate a discount rate that benefits both parties, it is in their interest to make their collaboration last. With this in mind, it may be worthwhile for a customer to integrate its suppliers into a collaborative platform (such as the one set up by Generix Invoices Services) in order to facilitate the exchange of invoices and automate its payments, generating a virtuous circle of lower costs.
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