The advantages include:
- Getting paid early
- You may receive your money before other suppliers
- It lowers your cost of borrowing
- Increases working capital
- Reduces the risk of late or delayed payments
However, there are also downsides:
- Customer may pay within standard terms or even late and still take the discount
- There is a “price” associated with early payment discounts. For example, a one percent discount on monthly invoices totals 12 percent interest annually.
The best advice is to evaluate the situation, customer and industry practices. If the customer has been paying on time and/or is a large corporation, you may not need to offer early payment discounts. But if your competitors offer discounts, you may be forced to provide the same terms.