Resources | Working Capital | June 13, 2023

How is Early Payment Different From Borrowing?

Banks may be the first place you go for business funding — but there’s a low-cost alternative that can increase cash flow, even during an economic downturn.

close up of a male holding a bag of money in his hands

In times of economic uncertainty, such as when there is rising inflation or bank failures, your business may have limited options for accessing capital. Interest rates can increase significantly, making loans unaffordable, and financial institutions typically make lending requirements stricter. Some may even cancel supply chain financing programs, which suppliers often rely on to maintain a sufficient cash flow while awaiting customer payments.

For many small to midsize businesses, qualifying for traditional bank loans can be difficult when the economy is healthy. But when borrowing becomes even less accessible, your business may struggle to fund day-to-day operations or make the investments needed to grow.
Enter: early payment programs. Regardless of the economic climate, early payment gives suppliers reliable access to cash without the qualification requirements, timelines or costs associated with traditional borrowing. What is early payment and how is it different from borrowing?

What is early payment?

Put simply, early payment means that your business receives invoice payments from customers earlier than your agreed terms in exchange for a small discount. 

Your business receives a cash flow boost from early payments, so you can fund daily operations, continue to supply products to your customers without interruption and fuel your business growth — benefits that usually outweigh the cost of an invoice discount for most small to midsize businesses. At the same time, early payment (with a discount) benefits your customers by reducing their accounts payable, as well as the risk of supply chain disruptions.

Early payment discounts are conventionally offered as static invoice terms. For example, “2/10 net 30” terms mean a customer receives a 2% discount for making a payment within 10 days. Otherwise, the customer pays the full amount within 30 days. A more modern approach uses early payment programs and dynamic discounting to give both parties more flexibility over discount rates and timelines. Here’s how it works:

  1. Your customer implements an early payment program and uploads all of its suppliers’ outstanding invoices to an online portal.
  2. As a supplier, you have the option to log in to the portal at no cost and view any outstanding invoices with that customer.
  3. Then, you choose invoices for early payment and set a desired discount rate. With dynamic discounting, the discount amount fluctuates with the payment date. The earlier the customer pays, the bigger the discount.
  4. If the rate is agreeable to the customer, the supplier receives the discounted payment in as little as 24 hours.

Such programs have two significant advantages over static early payment terms. First, you can control the discount rate you’re willing to offer. Second, your customers can pay at any time before the full term — not just within a set time frame — and still receive a discount. Because dynamic discounting adjusts the discount based on the payment date, customers are incentivized to pay earlier rather than later in the term.

Early payment vs. borrowing

A traditional borrowing arrangement typically requires businesses to complete underwriting and approval paperwork, which can take months and can be difficult for less-established businesses to provide. Once approved, the business is obligated to make loan payments with interest monthly. Many banks charge other fees as well. For example, they might charge annual, origination and late payment fees. 

Here are some key differences between this traditional borrowing process and early payment discounts:

1. No debt

With early payment discounts, there’s no third-party lender involved because your customer funds early payment directly from its capital. The only cost to your business is the discount itself, which means you receive a cash flow boost without taking on any additional debt. 

2. Recession-proof

During an economic downturn, banks may pull back on working capital solutions — such as lines of credit or supply chain financing — to protect their assets. Early payment programs are external to traditional lenders, relying only on your customer’s willingness to accept a discount for early payment. This means that they remain an available source of capital regardless of changing economic conditions.

3. Quick cash

If your customer implements an early payment program, you may have invoices available for early payment immediately. Setting up an account and creating an early payment offer only takes a few minutes, and payments can arrive in as little as 24 to 48 hours once your customer accepts an offer. This turnaround time is valuable for businesses that can’t afford to wait weeks or months for traditional credit approvals.

4. Scaleable

The cash flow you build through early payment scales with your customer receivables. Traditional loans, however, are limited to the amount you are approved for. For example, imagine that you just landed a big customer but your business loan is insufficient to meet the new demand. Receiving early payment from that customer will likely offer the significant cash flow increase you need to address growing demand.

5. Flexible

There are no commitments for participating in early payment. In fact, early payment programs allow suppliers to decide when to accelerate invoices and set their own discount rates. Unlike traditional business loans or other financing solutions such as invoice factoring, this gives you more control and flexibility over your accounts receivable.

6. No interest accrual

While interest rates vary depending on the business and the lender, the average interest rate for a small business bank loan starts somewhere between 5% to 10% APR. Online lenders may charge significantly more. With early payment, there is no debt or interest accrual. The only cost is the discount offered on each invoice.

7. No fees

Aside from the discount itself, suppliers don’t pay any additional fees to participate in an early payment program. Suppliers that opt for static discount terms often pay around 1% to 2% of the invoice amount to receive early payment. Dynamic discounting programs, which adjust the discount amount based on how early the customer pays, often result in even lower discount costs.

8. No covenants

Some financial institutions require businesses to agree to debt covenants to secure loans. For example, some covenants may require you to maintain financial ratios, report on your business’s finances or open insurance policies to sustain funding access and minimize lender risk. Early payments involve no covenants or strict terms, and allow you to make early payment offers on demand with your customer.

How to leverage early payment

If your business struggles to maintain cash flow and can’t afford or qualify for traditional loans at this time, early payment discounts are an effective, low-cost way to increase working capital. 

This could mean offering early payment discount terms on your next round of customer invoices — but a better place to start is by investigating whether any of your customers already implement an early payment program online. These early payment programs are usually easier to use and require fewer accounting resources than managing discount offers manually. 

For example, C2FO’s Early Pay solution allows you to create a free account if any of your customers support the program. Once you’re logged in, you can view outstanding invoices, set a discount rate and make early payment offers right away. For further cost savings, you can also leverage the C2FO CashFlow+™ Card to receive early payments without the discount.

Learn more about C2FO’s Early Pay solution or search our buyer network to discover if any of your outstanding invoices are currently available for early payment.

Infographic: Early payment vs. traditional lending

This helpful infographic breaks down early payment vs. traditional lending at a quick glance.

This article originally published May 2020, and was updated June 2023.

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