Early Payment Discount

Getting customers to pay their bills & liabilities can be as difficult as pulling teeth. Many clients put off making a payment until the last minute & for some special ones you need to send multiple payment requests after the due date has passed. These temporary cash flow problems can sometimes affect your future business possibilities and if your business needs working capital, you can have an early payment discount offered by Mynd Fintech to solve your problem & help in speeding up the payments. 

What’s an early payment discount? 

Early payment discount (EPD) is a type of trade finance that allows businesses to obtain a discount on supplier or vendor invoices by paying them before the due date. An early payment discount is a price cut offered to customers (buyers) who can receive their purchases if they pay before the due date. Here Mynd Fintech acts as a vendor & helps businesses in obtaining an early payment discount & facilitating it.

 It’s typically calculated as a percentage of the total cost of the goods and services purchased. The cash discount, prompt payment discount, or sales discounts are terms used to describe this type of discount offer. It helps to increase your credit line by benefiting both accounts receivable and payable because invoices give enough time to customers to pay their bills (e.g., 30-60 days), many businesses offer an early payment discount as a tonic to speed up their payments. 

How to calculate an early payment discount?

There are three methods to calculate the early payment discount (EPD): Static discounts, sliding scale discounts, and dynamic discounts. Let us understand these three methods with an example: Suppose company XY has purchased goods worth Rs.50000 from company AB and the due date for payment of this bill is 60 days. Company AB decides to offer an early payment discount to Company XY. Some EPD scenarios could be:

Static early payment discount

In Static EPD, the discount rate is fixed and does not change, regardless of the size of the payment. 

Company AB offers Static EPD of 2/30 – net 60. In this case, if XY pays the bill within 30 days, the company can get a 2% discount. XY has to pay 49000 rs (50000 rs less 2%) if they pay within 30 days otherwise 50000 rs if paid after 30 days.

Sliding scale early payment discount

In the Sliding Scale EPD, the discount offered by the seller decreases over an increasing period of time. 

Like 2/15, 1.5/30, 1/45 – net 60. In this case, if company XY pays the bill within 15 days then it has to pay 49000 rs (50000 rs less 2%), if pays within 30 days then 49250 rs (50000 rs less 1.5%) and if pays within 45 days then 49500 rs (50000% less 1%) otherwise full after 45 days.

Dynamic early payment discount

It is a flexible type of EPD. In this method, a buyer can match the EPD offer with his own offer instead of accepting the fixed discount rate for a period of time. Suppose AB offered an EPD of 1/30 – net 60. To counter this offer company XY asked for 2/30 – net 60. After negotiation, they finalize the EPD of 1.5/30 – net 60. Now Company XY has to pay 49250 rs (5000rs less 1.5%) if pays within 30 days otherwise full.

Early Payment Discount Example-

A seller/vendor like Mynd Fintech offers its customers a 1% discount if they pay in 10 days instead of the typical 30 days. That means Mynd Fintech is offering a 1% discount for obtaining cash 20 days ahead of schedule, and the customer is saving 1% by paying 20 days ahead of schedule. As a result, if a 1,000-rupee invoice is paid within 10 days, the 1,000-rupee obligation will be fulfilled in whole for ₹990 only. If the consumer has sufficient funds or a readily available line of credit, the 1% early payment discount for paying 20 days ahead of schedule can result in an extremely attractive annualized rate of around 18%.

Advantages of early payment discount for the Suppliers

1. It provide the primary benefit of allowing suppliers to be paid sooner, which accelerates cash flow provides extra liquidity & reduces the need for funding. 
2. It also helps in lowering the possibility of nonpayment or late payment & reduces the risk of bad debt and protects your supply chain by providing sufficient liquidity which will make the supplier’s financial position solid in the market. 
3. It’s an attractive alternative to traditional financing methods like commercial-based lending for some non-investment grade suppliers.  -Participating in early payment discount programs helps in improving suppliers’ connections with their customers, which can lead to future business deals down the road.

Advantages of early payment discount for the Buyers

1. It helps buyers to reduce costs on goods & services and helps in savings.
2. It helps to strengthen the relationship with the supplier.
3. It reduces the risk of getting the supply chain disrupted. 

Alternatives for early payment discount

Supply chain finance or accounts receivable finance is an alternative trade finance option by Mynd Fintech, which is available to buyers and suppliers wanting to improve cash flow and optimize working capital. 

Supply chain financing, also known as supplier finance or reverse factoring, is a set of solutions that helps businesses improve cash flow by allowing them to extend payment terms to their suppliers while simultaneously allowing them to be paid early. Receivables sold through a supply chain finance program are nominally discounted at a rate based on the buyer’s credit cost, which is typically lower than the credit cost a supplier pays to its financing providers. This type of financing helps companies to get early payment on their pending invoices to their funders for early payment in return for a small fee. 

Under this financing program, the receivables sold or pledged are normally discounted at the supplier’s credit cost until & unless the supplier pledges or sells its entire portfolio of receivables.

This kind of financial solution helps to maintain cash flow & provide huge sums of working capital for both buyers & suppliers.

Conclusion

When discount terms are added to a pay cycle it benefits both the vendor & the customer. For all parties concerned, it’s a win-win situation. It not only assists in cash flow problems but also helps a company in avoiding late payments & strengthens business relationships. 

Overall, early payment discount terms offered by Mynd Fintech improve your bottom line by providing greater working capital for business expansion and making the process flexible.

FAQs:

Q. 1 How do I calculate an early payment discount?

Ans: The early payment discount is determined by multiplying the discount percentage (for example, 1%) by the invoice amount. A 1% reduction on a $1,000 invoice, for example, equals $10. The consumer would pay $990 if the invoice was paid within the discount conditions, such as 10 days.

Q. 2 Where can I record an early payment discount?

Ans: With the help of Mynd Fintech, you can record an early payment discount. It’s done in three steps:

• Creating payment arrangements with a discount for paying early. 
• Then, on a customer’s invoice, apply the early payment discount terms.
• By accepting payment against an invoice with terms for early discount payment.