Should You Offer Early Settlement Discounts?

The Carrot Approach to Payment

Instead of penalties for late payment, offer a discount for early payment. E.g., "2% off if paid within 7 days" instead of the standard Net 30.

Pros

• Faster cash: Most clients will pay early for 2% off
• Better relationships: Rewarding feels better than penalizing
• Less admin: No chasing, no interest calculations
• Improved cash flow: Critical for small businesses

Cons

• Costs you money: 2% discount on £1,000 = £20 loss
• Some abuse it: Clients may claim the discount even if they pay late
• Not always effective: Corporate clients don't care about 2% — they pay on their schedule

The Math

Is a 2% discount worth it for faster payment?

• You lose: £20 on a £1,000 invoice
• You gain: Cash 23 days earlier (instead of Net 30)
• Effective interest rate: 2% × (365/23) = ~32% APR

If your cost of borrowing is less than 32% APR (most business loans are 5–15%), the discount pays for itself.

How to Structure It

Invoice Total: £1,000
Less 2% early settlement discount (if paid by 22 May): -£20
─────────────────────────────────────────────────────
AMOUNT DUE: £980 (if paid by 22 May)
AMOUNT DUE: £1,000 (if paid by 29 May / Net 14)

FAQ

What's a reasonable discount rate?

1–3% is standard. More than 3% eats into profit too much.

VAT implication?

If a discount is offered, VAT is calculated on the discounted amount IF the discount is taken. If they pay full price, VAT stays at the full amount.