Your supplier offers 2% for paying early. Should you take it?

Usually yes, provided the cash can spare it. The quick test: divide the discount in dollars by the number of days early you’d be paying. A 2% discount for paying in 7 days instead of 30 works out at about $8.70 a day on every $10,000 of invoice. Very little else in a small business pays that well for parking cash for three weeks. The catch is the second test. Your forecast has to survive the money leaving early.

The offer usually turns up as a line in small print at the bottom of an invoice: “2/7 net 30”, or “2.5% if paid within 14 days”. Plenty of owners ignore it because 2% feels too small to bother with. Others grab every one, then find themselves short in the week the BAS is due. Both habits cost money. This feature shows you how to tell the difference in about five minutes.

What is an early payment discount, exactly?

It’s a price reduction a supplier offers if you pay before the normal due date. It’s sometimes called a settlement discount or prompt payment discount. The usual shorthand reads like this:

• 2/10 net 30: take 2% off if you pay within 10 days; otherwise pay the full amount within 30.
• 1/7 net 14: 1% off for paying within a week; full price due at 14 days.
• 3% COD: 3% off if you pay on delivery rather than on account.

The supplier isn’t being generous. They’re buying certainty and speed, because cash in hand is worth more to them than a debtor on their books. business.gov.au’s guidance on payment terms is written from the seller’s side, but it’s a useful reminder that terms are a negotiation, not a law of nature. If your supplier wants money sooner, that has a value, and the discount is their price for it.

How do you work out if the discount is worth it?

Forget percentages for a moment and work in dollars and days.

1. Dollars saved = invoice amount × discount.
2. Days early = normal due date minus the discount deadline.
3. Dollars per day = dollars saved ÷ days early.

That last number tells you what each day of handing over your cash early is earning. Here’s how common offers compare on a $10,000 invoice:

Offer	Dollars saved	Days early	Earned per day early
1% within 7 days, else 30	$100	23	$4.35
2% within 7 days, else 30	$200	23	$8.70
2% within 10 days, else 60	$200	50	$4.00
2.5% within 14 days, else 45	$250	31	$8.06
3% on delivery, else 30	$300	30	$10.00

Two things jump out. First, the length of the gap matters as much as the percentage. Two per cent for paying 50 days early earns less per day than 1% for paying 23 days early. Second, the short-gap offers are strong. If the $10,000 is sitting in an everyday account earning next to nothing, $8.70 a day is a very good use of it.

Now compare that with your alternatives in dollars, too: what the same cash would earn sitting in a savings account for those days, or what it would cost in dollars to fund the payment from a facility. Ask any lender or your bank for the total dollar cost for that amount over that number of days, fees included. Then compare like with like.

Can your cash flow actually spare it?

This is the test most owners skip, and it’s the one that bites.

Paying early doesn’t change how much you pay in total. It changes when the cash leaves. If you pay a $44,000 invoice three weeks early, your bank balance is $43,120 lower for those three weeks. If anything else lands in that window, you’ll feel it. That might be a quarterly BAS, a payroll heavy with holiday pay, or a big customer paying late.

Before you take a discount, run it through your 13-week cash flow forecast:

• Move the supplier payment to the earlier date.
• Check your lowest week over the next 13. Does it stay above your minimum balance, the buffer you never want to drop below?
• Look for clashes: BAS and PAYG due dates, super, rent, loan repayments and any seasonal stock buy.

If the lowest week still clears your buffer comfortably, take the discount. If it dips below, you have three choices. You can skip the discount this time. You can take it on part of the order only, if the supplier will split invoices. Or you can fund the early payment deliberately, which we’ll come to.

What you don’t want is to take the discount, then pay a dishonour fee, a late fee or an ATO general interest charge a fortnight later. That wipes out the saving and then some. Our guide to stock and cash flow covers how supplier timing fits with how much stock you carry.

A worked example: the homewares wholesaler

Illustrative example only. The figures are invented to show the arithmetic.

An owner runs a small homewares business that sells online and to a handful of gift shops. Her biggest supplier invoices about $40,000 a month plus GST, so $44,000 all up. The supplier’s terms are 30 days, with 2% off for payment within 7 days.

The discount in dollars:

	Monthly	Yearly (12 invoices)
Invoice incl. GST	$44,000	$528,000
2% discount incl. GST	$880	$10,560
Discount excl. GST (the profit effect)	$800	$9,600
Days paid early	23	—
Earned per day early	about $38	—

What it does to margin. The business turns over about $800,000 a year (excluding GST) at a 40% gross margin, which is $320,000 of gross profit. The $9,600 saving goes straight to gross profit, lifting the margin to 41.2%. To make the same $9,600 by selling more, she’d need about $24,000 of extra sales at a 40% margin. Taking the discount means no extra customers, no extra marketing and no extra stock.

The cash check. Her forecast shows a minimum balance of $30,000 that she doesn’t want to break. In most months, paying early still leaves her lowest week around $45,000, so she takes the discount. In late October, though, the forecast shows Christmas stock orders and the quarterly BAS hitting the same fortnight, and her lowest week drops to about $12,000.

She has two options for that month:

• Skip the discount once. Cost: $880.
• Fund the early payment with a short draw on a business line of credit, repaid as December sales come in. Before choosing, she asks for the total dollar cost of drawing $43,120 for 23 days, including any fees. If that figure is well under $880, funding it keeps the margin gain and protects the buffer.

Either is a sensible answer. Draining the account below $12,000 a week before BAS day isn’t, and that’s the mistake the forecast stops her making.

If your own forecast shows a similar pinch, it’s worth knowing in advance what a facility would cost. You can see what you might qualify for in about a minute, with no credit check when you first enquire.

Should you borrow to take a supplier’s discount?

Sometimes, and it’s one of the cleaner reasons to use a facility, because the payoff is known in dollars before you start. It works when:

• the discount in dollars clearly beats the total funding cost in dollars, with room to spare for timing slips;
• the repayment source is real and close: customer receipts your forecast can actually see, not hoped-for sales;
• the facility comes back down. A line of credit used for discounts should rise and fall with your trading cycle. If it ratchets up every month and never clears, the discount is quietly being paid for with permanent debt.

It doesn’t work when the business is already short of cash for everyday bills. In that case the discount isn’t the problem to solve. Our seven tests for when to borrow are a good filter. A discount that passes them is a better reason to borrow than most.

Does taking the discount change your GST?

It can, so tell your bookkeeper before the first one goes through.

The ATO includes “settlement or trade discounts” that buyers receive for paying early in its list of price reductions that can trigger a GST adjustment (how GST applies to rebates). In plain terms: if you claimed the GST credit on the full tax invoice and then paid 2% less, the credit you claimed may now be slightly too high, and it needs adjusting on a BAS.

The supplier has paperwork to do too. Under the ATO’s rules on adjustment notes, an adjustment note is generally needed when the GST adjustment is more than $75. Below that, no note is required. In the example above, the GST part of each monthly discount is $80, so it’s just over the line.

The practical fix is simple. Agree with your bookkeeper how discounts get recorded in your accounting software, whether as a reduced bill amount or a separate credit, so the GST lines up and the margin gain shows where you can see it.

How do you get a supplier to offer one?

If your main suppliers don’t offer a discount, ask. Suppliers carrying 30 to 60 days of debtors often value reliable early payment more than you’d expect.

• Lead with your record. “We’ve paid on time for three years. If we moved to paying within 7 days, what would that be worth to you?”
• Pick the right supplier. Start with your biggest spend, because 1.5% on a large account beats 3% on a small one.
• Get it in writing, including what counts as “paid”: the date you send the payment or the date it clears.
• Keep it reviewable. Agree to revisit it each year, alongside your gross margin review.

And check the other side of the ledger. If you’re tempted to offer your own customers a discount for paying early, run the same dollars-per-day maths on yourself first. Our payment terms guide covers why shorter terms are often the cheaper lever.

Small percentages, real money: let’s get the timing right

A supplier discount is one of the rare places where a business can lift its margin without selling a single extra thing. All it needs is cash at the right moment. Most months, your own balance will do the job. In the tight months, around Christmas stock, BAS quarters or a seasonal dip, a facility sized to your trading can bridge the gap so you keep the saving and your buffer.

That’s the kind of funding we look at every day. For trading businesses, unsecured and line-of-credit options typically range from $5,000 to $500,000, sized on turnover and bank statements. Property-secured loans run from $20,000 to $5,000,000, all for business purposes.

The enquiry takes about 60 seconds and there’s no credit check when you first enquire. We don’t pass your details around a pile of lenders, so you won’t spend the next week fielding calls from strangers. A real person who understands supplier terms and cash cycles reads your answers and calls you to talk through your situation. Please fill the form in accurately: turnover, time trading, what the money is for and roughly how much your supplier spend is. That way the first option we suggest is the right one.

See if you qualify →