What Happens If My Customer Pays Early?
If your customer pays before the expected date, you pay less discount charge (interest) because the advance was outstanding for fewer days. So early payment lowers your cost. The lender then pays you the part of the invoice it held back, less its fees.
What changes when a customer pays early
- The discount charge is smaller. It is interest on the money the lender paid you, worked out for each day until your customer pays. Fewer days means less interest.
- The service fee usually stays the same. It is normally a percentage of the invoice or of your turnover, so it does not depend on when the customer pays.
- You get the rest of the invoice sooner. The part the lender held back (often called the reserve or retention) is paid to you, less fees, once the customer's payment arrives.
- Your available funding goes back up sooner. Your limit stays the same, but the money you drew is repaid earlier, so you can draw against new invoices.
A made-up example
You finance a £10,000 invoice. The lender pays you 80% now, which is £8,000. The discount charge in this example is 7% a year on the £8,000. These figures are made up to show how it works; your own rates come from your agreement.
- Customer pays on day 60: £8,000 x 7% x 60 / 365 = about £92.
- Customer pays on day 25: £8,000 x 7% x 25 / 365 = about £38.
- Paying 35 days early saves about £54 in discount charge.
Should you offer customers a discount to pay early?
Work it out first. In the example above, a 2% discount on the £10,000 invoice would cost you £200, but paying 35 days early only saves about £54 in finance charges. Unless your rates are much higher, an early payment discount usually costs more than it saves. If your invoices are financed, check your agreement before offering one, as the lender may need to agree to any change to what the customer pays.
What to check in your agreement
- How the discount charge is worked out, and whether there is a minimum charge per invoice.
- When the held-back part of the invoice is paid to you after the customer pays.
- Whether you need the lender's consent to offer customers a discount.
Related questions
What happens if my customer pays late instead?
The discount charge keeps adding up each day. Many agreements also set a point after which the lender stops funding an unpaid invoice and asks you to repay the advance. See my customers take 60 to 90 days to pay.
Will a lender give me a better rate if my customers pay quickly?
It can help. Lenders look at how reliably your customers pay when they set the terms. A record of prompt payment is worth raising when your facility comes up for review.
Founder & Managing Director, Muswell Rose, founder and PSC of Best Business Loans Ltd
Adam is the founder and managing director of Muswell Rose and a founder of Best Business Loans Ltd, the company behind Market Invoice. He spent over three years as managing director of Penny, a UK invoice finance business, and his career runs through insurance, mortgages, commercial finance and fintech lending. He writes the Market Invoice library.
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