As many before me have said, ‘cash flow is the lifeblood of your business,’ but it’s been said so many times because it’s true! Unfortunately, getting your hands on that cash is not easy, especially when you’re talking about collecting the money owed to you from customers. There are many ways to improve cash flow by focusing on improving invoice collection metrics, but today we’re going to focus on one specific tactic, early payment discounts.

While offering a discount for early payment can be a great way to get paid faster, the early bird does not always get the worm! Below are three important things every company should consider before offering discounted terms.


Be sure your profit margins allow for the discount prior to offering it to a customer. Even if you’re in desperate need of cash, an early payment discount can be harmful in the long run. For example, a company who has a 10% profit margin and offers a 2% discount for early payment is giving up twenty percent of its profit! So before you start using this as a tactic to improve cash flow, be sure to carefully look over your financials to make sure you can afford to do so.


Just as you should be selective about which customers are sold to on credit, you need to be careful about which customers are offered an early payment discount. Only choose those customers who are most likely to honor the agreement to pay early without trying to play any games in the process. For example, a customer may agree to your 1/10/30 terms (that’s a 1% discount in 10 days on an invoice that is due in 30 days) but still remain slow to pay you. You can protect against this by being selective and you can even put an early payment clause in the contract.


There are many reasons a company would offer a customer a discount for early payment, always be sure you’re aware of your purpose for the discount. For example:

  • You simply want to improve cash flow! There’s nothing wrong with wanting to increase cash on hand, getting paid early is always a good thing as long as you know this is a viable and responsible way for your company to do so.
  • You want to get paid ahead of your customer’s other suppliers. If you feel as though your customer is low on cash, offering a discount can help you increase the likelihood that your invoice(s) will be paid before others.
  • You’re trying to reduce the risk of non-payment. Studies and experience show that the longer it takes for a company to get paid, the less likely it is that they will ever actually collect the money they are owed so getting paid sooner alleviates the risk.
  • You’re trying to find ways to reduce the cost of borrowing because the more cash you have, the less you need to borrow which is especially important for companies who are having a hard time getting a loan and/or interest rates are through the roof!

As mentioned above, there are many other ways to improve cash flow and your invoice collection performance. This is just one way to take the steps toward maintaining an efficient and healthy accounts receivable department.