Should I offer customers a discount for paying early?

Mr says: a discount for paying early is a price cut with a deadline attached. Sometimes it’s the cheapest money in the business. Sometimes it’s margin handed to customers who were going to pay on day nine anyway. The way to tell is simple: put a dollar figure on the discount, put a dollar figure on the cash it brings forward, and see which is bigger.

Owners ask Mr about this a lot in the run-up to the busy end of the year, when stock is going out the door and the cash for it won’t arrive until well into the new year. So let’s do it properly.

How does an early payment discount actually work?

You add a line to your terms offering a small reduction if the customer pays within a short window. The classic shorthand is 2/10 net 30: take 2% off if you pay within 10 days, otherwise pay the full amount in 30.

You don’t have to copy that. Plenty of Australian businesses use something gentler, like 1% within seven days, or a flat dollar amount off invoices paid by direct debit. business.gov.au’s guide to improving your cash flow suggests encouraging “upfront or early payment with discounts, late fees and deposits”, so it’s a recognised tool, not a gimmick.

The catch is that a percentage off an invoice sounds tiny, and it isn’t.

What does the discount really cost me?

Forget percentages for a moment and think in dollars over a year.

Mr’s rule of thumb: yearly cost = monthly sales that take the discount × the discount × 12.

Then work out what you get for that money. Customers who take the discount pay sooner, so less cash sits in your debtors at any one time. Roughly:

Cash freed up = monthly sales that take the discount × days sooner ÷ 30.

That freed-up cash is a one-off improvement to your bank balance that stays there as long as customers keep paying early. The discount, on the other hand, keeps costing you every month.

Here’s a simple table for a business invoicing $100k a month, where the customers who take the offer used to pay around day 40:

Discount offered	Share of sales taking it	Pay on day	Yearly cost	Cash freed up
1% within 7 days	40%	7	about $4,800	about $44,000
2% within 10 days	50%	10	about $12,000	about $50,000
2% within 10 days	20%	10	about $4,800	about $20,000

Illustrative figures only. Plug in your own numbers.

Look at the last two rows. Same discount, very different value, purely because of who takes it up. And notice the second row: $12k a year to free up about $50k. Whether that’s a good trade depends on what else that $50k would cost you.

Is it cheaper than borrowing the money?

This is the comparison most owners skip, and it’s the one that matters.

Take the freed-up cash figure and ask: what would it cost, in dollars, to have that much available on a line of credit or short loan for a year? Get a real quote, including fees, and compare dollar to dollar. Mr’s guide to what a business loan really costs walks through which fees to count.

• If the discount costs less than funding the same gap, the discount wins, as long as customers actually change their behaviour.
• If the discount costs more, you’re probably better off keeping full price and funding the gap. A revolving facility suits gaps that come and go with your invoicing cycle; see line of credit or term loan for how the two differ.
• Many businesses end up doing both: a modest discount to nudge the slow-but-reliable payers, plus a facility in the background for the big customers who won’t budge.

Debtors stretching out and the busy season coming? Tell Mr what you invoice and how long customers take, and a real person will look at whether a facility makes sense next to your terms.

Who will actually take the discount?

Here’s the part the textbooks gloss over. The customers most likely to grab a discount are the ones with spare cash and tidy accounts payable, which often means your best payers already. If someone pays on day 12 out of habit, giving them 2% to pay on day 10 buys you two days for real money.

The customers you actually want to speed up, the ones drifting out to day 50 or 60, are often short of cash themselves. A small discount won’t change much for them.

Before you change your terms, pull a report from your accounting software showing each customer’s average days to pay over the last six months. Then sort them into three groups:

1. Already prompt (paying inside your terms). A discount mostly costs you money here.
2. Slow but solvent (paying late, but always paying). This is where a discount can earn its keep.
3. Struggling (paying very late, part-paying, making excuses). A discount won’t fix this. Credit limits, deposits or tighter terms will.

Mr’s view: offer the discount to group two by invitation rather than printing it on every invoice. You can always widen it later.

What about the big customers?

Large customers often set their own terms, and some take a long time to pay smaller suppliers. Under the Payment Times Reporting Scheme, large businesses report how quickly they pay small business invoices. The regulator’s January 2026 update said the average number of days to pay 95% of small business invoices rose to 64 days for January to June 2025, up from 58. You can look up a reporting business on the public register before you agree to its terms.

Some big companies also run their own early payment programs, where they pay you sooner if you accept a reduction. That’s the same deal as offering a discount, just with them setting the price. Run it through the same dollar comparison before you sign up.

Does an early payment discount affect my GST?

Yes, and this is where owners get caught out at BAS time.

The ATO lists settlement discounts for early payment among the price reductions that can change the GST on a sale. In practice:

• If you report GST on an accruals basis, you’ve already reported GST on the full invoice. When a customer takes the discount, you’ll usually make a decreasing adjustment on a later BAS.
• You’ll generally need an adjustment note before you can claim that decreasing adjustment, unless the GST change is $75 or less.
• If you report on a cash basis, the timing works differently, so check with your bookkeeper how your software records it.

None of this is hard once it’s set up. It’s just much easier to set up before the first customer takes the discount than to untangle it in March. And if a BAS bill ever lands at a bad moment, can I borrow to pay my BAS? covers the options.

A worked example from Toowoomba

This is an illustration, not a real client.

Priya runs a commercial cleaning supplies wholesaler in Toowoomba, invoicing about $150k a month on 30-day terms. Her customers are cafés, gyms, aged care homes and a few larger facility managers. Average days to pay has crept out to 46.

She’s looking at 1.5% off for payment within seven days.

What her report shows: about a third of her sales come from customers who already pay inside 15 days. Another 40% are slow but reliable, usually paying around day 50. The rest is two facility managers who pay on their own schedule no matter what.

Option A: put the discount on every invoice. Her prompt payers would almost certainly take it, costing around $9,000 a year for just a week or so of extra speed. Not great.

Option B: invite only the slow-but-reliable group. If half of them take it up, that’s about $30k a month of sales paying on day 7 instead of day 50. The cost is roughly $5,400 a year. The cash freed up is about $43,000, which stays in her account as long as they keep paying early.

What she does: Option B as a three-month trial, with the deadline written into her terms and a clear rule that late payers don’t get the discount. For the facility managers, she keeps full price and puts a modest line of credit in place to carry their invoices through the summer peak.

The trial tells her within one quarter whether customers actually change their habits, and she hasn’t given margin away to the people who were already paying on time.

Mr’s checklist before you offer a discount

1. Pull average days to pay for every customer over six months.
2. Cost the discount in dollars per year, not as a percentage.
3. Work out the cash it frees up, using days sooner, not days of terms.
4. Get a real dollar quote for funding the same gap, and compare.
5. Target slow-but-reliable customers first, by invitation.
6. Write the deadline and the late-payment rule into your terms.
7. Set up GST adjustments in your software before day one.
8. Review after three months, and drop it if behaviour hasn’t changed.

If you’re tidying up how cash moves through the business more broadly, How do I cover cash flow while customers pay late? and Mr’s plan for Payday Super are good next reads.

When terms alone won’t close the gap

A well-aimed discount can shave weeks off your debtor days. But some gaps are just structural: big customers on long terms, stock that has to be bought months before it sells, wages and super going out every pay run whether invoices are paid or not. That’s when it’s worth knowing what funding you could get, before you need it in a hurry.

That’s the bit we help with. Tell us roughly what you invoice each month, how long customers take to pay and what you’d use the money for. The enquiry takes about 60 seconds, and there’s no credit check when you first enquire. We won’t send your details to a long list of lenders and leave you dodging calls; your enquiry stays with us. A real person reads it, looks at how your business actually trades and rings you to talk it through. Please fill the form in accurately, especially your turnover and how long customers take to pay, so we can point you to the right option the first time.

See if you qualify →