Early payment discount: Overview, definition and example
What is an early payment discount?
An early payment discount is a reduction in the total amount owed by a buyer if they pay their invoice before the due date. It’s typically offered by suppliers or vendors as an incentive for businesses to settle their bills sooner than required. The discount is usually a percentage of the total amount, and the terms of the discount are specified in the contract or invoice.
Why is an early payment discount important?
An early payment discount is important because it benefits both parties. For the seller, it helps to improve cash flow by encouraging quicker payments. For the buyer, it reduces the overall cost of goods or services purchased. This can be a useful strategy for businesses looking to save money while also building a good relationship with their suppliers.
Understanding early payment discount through an example
Imagine your business receives an invoice for $5,000 from a supplier with the terms "2/10, net 30." This means you can get a 2% discount if you pay within 10 days; otherwise, the full $5,000 is due in 30 days. If you pay within 10 days, you would only pay $4,900, saving $100 on the total bill.
In another case, a software company might offer an early payment discount to its clients. If a client agrees to pay the annual subscription fee upfront, they might receive a 5% discount, resulting in significant savings over the course of the year.
Example of an early payment discount clause
Here’s how an early payment discount clause might look in a contract:
“The Buyer shall receive a 2% discount on the total amount due if payment is made within 10 days of the invoice date. After 10 days, the full amount is due within 30 days of the invoice date.”
Conclusion
An early payment discount encourages faster payments and can be a win-win for both buyers and sellers. By offering a discount, sellers improve their cash flow, while buyers save money. Including clear terms about early payment discounts in contracts can help businesses manage their finances more effectively and strengthen supplier relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.