What Is The Meaning Of A Cash Discount?

When starting up your first ecommerce business, there are a ton of different terms and tricks for you to learn. Some you may already be familiar with, and some you may only just scratch the surface of knowing. But, what is a cash discount? 

Here, we are going to be defining cash discounts including what they are and how you can use them to boost your ecommerce business. This way, you can find out if they are right for you and your business. 

So, let’s get right into cash discounts. 

What Is Cash Discount? 

Cash discounts are a type of incentive used by sellers to help encourage a customer to buy a particular product, whether it be a service or an item. Cash discounts are also known by other names including payment discounts, or early payment discounts, or sales discounts.

It is usually granted when a customer opts for immediate payment or for fulfilling a payment before its prescribed time. In short, you are rewarding the customer with a better deal in return for them paying their bill ahead of time. 

For example, imagine you are selling your customer a product for $300. You send them an invoice of their bill and request full payment within 30 days. However, if the customer pays the full bill within 10 days, they get a cash discount of 2% – saving them $6 – but only if they pay the full amount within 10 days after receiving their invoice. 

This is a typical example of a cash discount. 

Alternatively, cash discounts can be offered to customers who opt to pay with cash instead of credit cards. Businesses usually have to pay fees or charges to have bank payments processed and in order to avoid these fees, a cash discount is offered to customers as an incentive for customers to pay their bills through cash. 

Of course, as an ecommerce business who can sell products to customers all around the world, this type of cash discount is unlikely to be relevant to you. 

Who Benefits From Cash Discounts? 

Cash discounts are a pretty common type of incentive used by a lot of businesses because it offers benefits to both the business and to its customers. 

By offering customers a cash discount, they are motivated to pay their bill in full a lot sooner than they may have originally planned. This means that the seller can access that cash a lot sooner too and this can be super handy in numerous situations. For example, the seller can immediately reinvest the cash into their business and boost its growth, or save it whenever they experience a cash flow shortfall. 

Plus, another benefit cash discounts offer the seller is by saving time, cost, and energy that goes into billing a customer. By providing a customer with an incentive to pay their bill a lot sooner, your business won’t have to worry about sending further notices or bills to make sure your customer is prepared to pay before the deadline. This can save a business a lot of time and money, allowing newer businesses to focus on other areas.

Many businesses may initially think that it’s counterproductive to offer products and services for a lower price to customers, but the cash discount offered by businesses is usually equal to the cost the business would have spent on administrative costs by continuing to bill, mail, and process payments from customers. So, businesses are just giving that cost (or a part of it) back to its customers. 

But it’s not just the seller who benefits from a cash discount. 

Buyers and customers also benefit from cash discounts because they get to purchase their product at a more affordable price. Although most cash discounts are around 2% (which translates into savings of literal cents or a few dollars), it’s still a saving nonetheless.

Customers with the funds to pay their bill in  full from the start but have no incentive to put in the effort will certainly do so if it means they can save a bit of money. And, of course, the more your product costs, the more customers can save. 

Not all customers will be able to access this cash discount, however. Some customers don’t have the funds to pay within the cash discount period and so, they won’t be able to benefit from this offer. However, customers who can pay their bill quickly can then walk away happy after saving money while still getting the product or service they wanted in the first place. 

Are Cash Discounts The Same As Trade Discounts?

Cash discounts and trade discounts are two different types of discounts which a lot of people mix up. 

Trade discounts refer to when a product or service is set at a reduced price by the manufacturer when it is sold to a retailer. It is basically your regular, old-fashioned type of discount. You offer money off the original price, the customer pays a reduced price – no questions asked. 

With cash discounts, there are strings attached. If a customer wants to pay the lower price, they need to meet certain conditions such as paying their reduced bill in full within a set time frame. If they do not meet this criteria, they lose access to the cash discount. They are also used by businesses to encourage customers to pay sooner, as well as an incentive to purchase their product rather than with their competitors. 

Alternatively, trade discounts just need to be grabbed when they are there. There’s no guarantee that the trade discount will stick around, but customers do not need to meet any kind of criteria first. They are also only used to encourage customers to shop with the business over its competitors. 

This means that cash discounts and trade discounts are not the same, even though they are both types of discounts used by businesses. 

Frequently Asked Questions

Are Cash Discounts Legal?

Both types of cash discounts are perfectly legal in the United States as all states allow businesses to implement them as they see fit. 

Is A Cash Discount Recorded In An Invoice?

Yes, cash discounts should be recorded in an invoice so both the seller and buyer have evidence that they received a cash discount. The invoice should show both the net and gross price of the product to display the deducted amount. 

What Is The Cash Discount Formula? 

To work out the exact amount of a cash discount per transaction, you need to use the following formula: 

Cash Discount = Purchase Price ፥ Discount Rate

So, if your business is offering a cash discount rate of 10% and a customer is buying a product for $20, the cash discount will be $2 and the customer will only pay $18. Learn more in our payment processing resource directory.