How your business can use early settlement discounts to improve trading relationships

Published: March, 22^nd 2024

Building strong trading relationships is about more than simply delivering your products or services. Whether you are dealing with a customer or a supplier, implementing technology that allows your business to be flexible and collaborative on every transaction can boost cash flow across the supply chain. Collaborating on every transaction may include allowing customers to take advantage of flexible payment terms or offering incentives such as early settlement discounts (ESD). Having the ability to use ESD can boost everyone’s cash flow and improve trading relationships. Keep reading for an overview of ESD and how they work.

What are early settlement discounts?

ESD serve as a strategic tool to encourage prompt payment from buyers. They work to improve cash flow and reduce the cost of carrying accounts receivable in your business. Managing ESD can sometimes be cumbersome for businesses, but by using an integrated payment solution the ESD process is streamlined. An integrated ESD process ensures that both parties are aware of the terms, deadlines, and potential discounts. This collaborative approach fosters transparency, efficiency, and trust between trading partners.

How do early settlement discounts work?

When an invoice is generated using integrated payments software, an ESD can be proposed by suggesting a percentage discount if the invoice is paid before the due date. For example, your business may send a customer their invoice and include a line that shows they can secure a 5 per cent discount on their total if they pay in advance of their standard terms. If the customer takes advantage of the ESD, your business gets paid faster, and the customer receives a small discount. Both businesses have boosted their cash flow in the process, and your business, as the supplier, lowers the cost of carrying outstanding receivables.

What are the benefits of early settlement discounts?

There are many benefits of ESD for buyers and suppliers. An overview of the key benefits is outlined below.

Buyer benefits

Cost savings: Buyers can secure goods or services at a discounted rate by making early payments, leading to direct cost savings on their purchases. This provides a financial advantage, allowing them to optimise their procurement budget and potentially improve overall profitability.
Enhanced supplier relationships: Taking advantage of ESD ensures suppliers get paid faster, which can lead to preferential treatment, better terms, and long-term collaboration opportunities for the buyer.
Ability to accept ESD without having cash-on-hand: Buyers can make the most of ESD from their suppliers without depleting their surplus cash by accessing third-party funding at a lower rate than their supplier ESD incentive.

Seller benefits

Risk mitigation: ESD incentivise buyers to make timely payments, reducing the risk of late or defaulted payments. Sellers can mitigate credit risk and maintain financial stability by ensuring a steady and predictable cash flow, contributing to a more secure business environment.
Improved cash flow: ESD expedite payment, providing sellers quicker access to cash. This enables sellers to meet operational expenses, invest in growth initiatives, and respond more effectively to market demands.

Use Spenda to strengthen your trading relationships

Using integrated payment technology to get paid faster and offer your customers ESD boosts cash flow for your business and saves your customers money, too. By implementing incentives such as ESD that benefit all parties, you can strengthen your trading relationships while reaping other benefits for your cash flow that accumulate over time.

Spenda’s latest whitepaper: How the right payment solution can transform your supply chain covers everything you need to know when choosing the right payment solution for your business.

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Spenda is an integrated business platform that enables businesses across the supply chain to sell better and get paid faster. We serve as both a software solutions provider and a payment processor and deliver the essential infrastructure to streamline business processes before, during and after the payment event.

This article is for general information purposes only. Consult a qualified financial advisor regarding any changes to or decisions about your business’s finances.