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Thread poster: David Turnbull
Incentivising fast payment

David Turnbull  Identity Verified
United Kingdom
Local time: 01:39
Italian to English
Sep 19, 2010

Dear all,

Obviously dealing with irregular and unreliable income is part and parcel of self-employment (particularly in the early days) and we're all painfully aware of the liberties some clients in our industry will take with long payment terms and late payments.

Has anyone had any success in achieving faster payments by offering a small discount (2%-5%, say) on payment within e.g. one week? Do clients bother to pay up quicker or do they stick to their usual payment practices in any case?

David


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Astrid Elke Johnson  Identity Verified
Germany
Local time: 02:39
Member (2002)
German to English
+ ...
My experience of doing this for 18 months Sep 19, 2010

Hi David,

For about 18 months I offered a 2% discount for payment within a week (extended to 10 days if international transfers were concerned). What I found was that this caused a considerably increased amount of administrative work, and some (not all) clients had a tendency to, for example, (1) pay later than the given deadline and still pay the discounted price, in extreme cases when paying after 5 or 6 weeks; (2) if they had received two or more invoices from me, pay the latest, if it was the smallest, in order to claim the 2% discount on it, paying the ones that had "missed" the discount deadline when long overdue. To handle this second practice, you would need to give them terms and conditions in advance, stating that payments received from them would be applied in the order that the invoices were issued. Bear in mind, though, that, if agencies are concerned, they do not normally accept terms and conditions of business from translators.

When I found that, due to these and other practices, there was little benefit to me in the system, I attempted to stop offering the 2% discount for early payment. Therefore I no longer printed it on the invoices. Despite its no longer being offered on the invoice as an option, some clients took it anyway, paying, at the same time, when they liked. One client was very persistent in demanding the right to continue to have the discount. I then had to face either putting up with clients' objections - and insistence on the 2% discount being continued as their right - or losing these clients, in an economic environment in which I could not afford to lose clients. As I had to apply the same rule to every client, I then had to, for example, negotiate cheaper prices with these clients, and tell them that the beloved discount was then included....

In summary, I strongly advise against this practice.

Astrid

[Edited at 2010-09-19 17:47 GMT]


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Edward Vreeburg  Identity Verified
Netherlands
Local time: 02:39
Member (2008)
English to Dutch
+ ...
5-10% works like a charm Sep 19, 2010

100% sucess rate, but sometimes international payments are delayed between banks, paypal etc - so I have to see which client to suggest such discounts....

(also used for new clients, who pay higher rates anyway, to see if it's worth the trouble)..

Another tip : if you have large clients / big outstanding amounts, just ask them if they can pay their bills quickly, if you have a good relation they generally will..
====
Ed


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Samuel Murray  Identity Verified
Netherlands
Local time: 02:39
Member (2006)
English to Afrikaans
+ ...
Learning from experience Sep 19, 2010


Astrid Elke Johnson wrote:
For about 18 months I offered a 2% discount for payment within a week (extended to 10 days if international transfers were concerned). What I found was that this caused a considerably increased amount of administrative work, and some (not all) clients had a tendency to, for example, ... pay later than the given deadline and still pay the discounted price, ...


Firstly, I don't think 2% is much of an incentive. If I were to consider such a scheme, I'd go for 5% (payment within 3 weeks) or 10% (payment within 2 weeks).

Secondly, you're quite right about clients claiming the discount when they're not entitled to it. I wonder how one can prevent that. Techniques I can think of include (a) using credit notes and (b) deducting the discount as a line item on the invoice following the quick payment.

My main question is how one would include the discount on the invoice (how legally (or accountancy compatible) to do it). Do you add it as a line item, e.g. "Minus 2% discount if payment is made before 29 September"? Or do you issue two invoices -- one without the discount and one with the discount (the latter marked as an updated invoice, with the proviso included)? Or do you issue a credit note for the amount of the discount, separate from the invoice? Or do you add the discount to the next job's invoice, as a line item (e.g. "Minus EUR 10.00 discount for early payment of previous invoice")?

I also think the discount should fit the circumstance. If an agency usually offers payment within 90 days, they are unlikely to pay within a week just to get a discount, but they may be willing to reduce their payment term to 30 days. I would definitely consider giving a 90-day client a 5% discount if he agrees to pay within 30 days instead.



[Edited at 2010-09-19 21:11 GMT]


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Gerard de Noord  Identity Verified
France
Local time: 02:39
Member (2003)
German to Dutch
+ ...
Your invoice is not the right tool Sep 19, 2010

Dear David,

French law obliges me to threaten all my clients with hefty penalty interests for paying too late. This hasn't scared any of my clients in the last ten years.

Payment discounts and prompt-payment discounts will often be entered into a payment system by people who don't deal with you. The same people who'll always enter the lowest amount mentioned on your invoices.

I think our invoices are not the right marketing tool to get paid faster. And, more important, I haven't found a solution yet.

Cheers,
Gerard

[Edited at 2010-09-19 22:10 GMT]


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Krzysztof Kajetanowicz  Identity Verified
Poland
Local time: 02:39
English to Polish
+ ...
whoa, 5-10%? Sep 19, 2010


Edward Vreeburg wrote:

100% sucess rate, but sometimes international payments are delayed between banks, paypal etc - so I have to see which client to suggest such discounts....

(also used for new clients, who pay higher rates anyway, to see if it's worth the trouble)..

Another tip : if you have large clients / big outstanding amounts, just ask them if they can pay their bills quickly, if you have a good relation they generally will..
====
Ed



If it takes 5% to get a client to pay a month early, heck, that's expensive.

If you can speed up payment by two months by giving a 2% discount, that's equivalent to borrowing at 1% a month (12.7% a year). Anything above 1% for paying a month early is absolute nonsense, unless you have such low credit standing that you won't be able to borrow at 12.7% a month with today's near-zero interest rates.


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Kiwiland Bear  Identity Verified
New Zealand
Local time: 12:39
Russian to English
+ ...
Another option Sep 20, 2010

One other option (already mentioned briefly) is to offer a discount on the next job for that customer - the faster they pay for the previous contract the larger discount they get for the next. The "gotcha" of course is what do you do with one-off customers? Just reconcile yourself for a long wait probably but, if you manage to land some repeat business, that scheme might work.

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John Rawlins  Identity Verified
Spain
Local time: 02:39
Member (2007)
Spanish to English
+ ...
Tell them to go elsewhere Sep 20, 2010

During the past couple of years I have told two clients (both Spanish agencies) that I was unable to continue working with them because of late payments. Neither responded to my email and both continued to send me job requests. Eventually, I put a filter on their email addresses.

I can recommend this approach for preventing late payments.


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Samuel Murray  Identity Verified
Netherlands
Local time: 02:39
Member (2006)
English to Afrikaans
+ ...
@John -- this is not the issue here Sep 20, 2010


John Rawlins wrote:
I can recommend this approach for preventing late payments.


Yes, but the issue here is not the prevention of late payments. It would make little sense to offer an early-payment discount to late-paying clients. Early-payment discounts are for clients who always pay on time. Only those clients would have the capacity or ability to adjust their payment terms.

If a client says "we pay at 90 days", and he pays at 90 days, then he is not a late payer, because he paid precisely on time (when he said he would). If a client says "we pay at 30 days" and it takes him 45-60 days to pay, then he is a late payer.

The early-payment discount is not an attempt to coax non-punctual payers to become punctual, but to encourage punctual payers to pay even earlier.


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Samuel Murray  Identity Verified
Netherlands
Local time: 02:39
Member (2006)
English to Afrikaans
+ ...
@Kiwiland -- next-job discounts Sep 20, 2010


Kiwiland Bear wrote:
One other option ... is to offer a discount on the next job for that customer - the faster they pay for the previous contract the larger discount they get for the next. The "gotcha" of course is what do you do with one-off customers?


My approach to the above problem would be to mention it to the PM that you have a special offer for repeat clients, namely the early-payment discount. It makes sense to offer something extra for repeat business, so I doubt if a once-off client will be offended because they do not qualify for the discount, even if they pay early.

Besides, most of my clients (even the truly once-off clients) firmly believe that they will be making frequent use of my services in future. When clients say "expect volume from us" they often really mean it (they truly think it will happen).


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Edward Vreeburg  Identity Verified
Netherlands
Local time: 02:39
Member (2008)
English to Dutch
+ ...
depends on how you look at it... Sep 20, 2010


Krzysztof Kajetanowicz wrote:

If it takes 5% to get a client to pay a month early, heck, that's expensive.



There is a difference between my normal rates and the ones I will offer a discount,
(plus 10-20%), so if my normal rate is 0,10 and I charge 0,12 and then offer a 10% discount, I'm still almost 0,01 in the plus - and I have my money within a week !

And in the perception of the client, he's just earned a big discount!

Ed


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Samuel Murray  Identity Verified
Netherlands
Local time: 02:39
Member (2006)
English to Afrikaans
+ ...
@Krzysztof -- depends on your reason for it Sep 20, 2010


Krzysztof Kajetanowicz wrote:
If it takes 5% to get a client to pay a month early, heck, that's expensive. ... unless you have such low credit standing...


Yes, it is expensive, but it depends on what you want to get. I would like to get easier/better cashflow and simpler accounting. For that, I would be willing to pay extra. The client is under no obligation to pay early, so the incentive has to be high enough.

If you offer the client exactly the same amount (in a discount) that he would get from his bank (in interest, or in overdraft savings), then there is no incentive for him to interrupt his normal flow of money.


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David Turnbull  Identity Verified
United Kingdom
Local time: 01:39
Italian to English
TOPIC STARTER
Good points all round Sep 20, 2010

It's interesting to hear your opinions and experiences of this idea. Thanks for responding.

In the light of Astrid's experience, I think a "next invoice discount" (as suggested by Samuel at al.) is definitely the way forward and has the added advantage of incentivising regular work.

What I'm thinking of now is perhaps some sort of accumulating discount. So for the first month in a collaboration I invoice the full price, if that's paid within a medium payment term of e.g. 20 days then you get 1% off next month, which if paid within 20 days gets you a 2% discount in month 3 and so on up until 10% which can continue until a break in invoices.

By which point this is obviously quite a hefty discount and you're giving away 10% of your work to that client for free. My way of (at least partly) compensating this would be to increase my rates by say 5% over the next year of our collaboration (perfectly acceptable in line with inflation and increasing experience) while all the time looking for new (higher paying) clients in any case.

So in theory I end up with faster payments, better cashflow, less hassle, more work and better-paying clients. And the client ends up with snowballing discounts (and good translations, of course, which are certainly the best way to incentivise good collaborations anyway).

But would it actually work? If the client is cost-concious enough and really intends to send you lots of work I see no reason why not.

P.S. @John Rawlins / @Samuel Murray - Yes, this would really be designed to cut down on 45 and 60 day payment terms which many Italian clients operate. On the other hand I have some clients who send lots of work and interesting projects but always pay a week or two late. A modified version of this scheme could be used to incentivise on time payments. I take the point that you naturally expect and are due on-time payments but as "businesspeople" I think we have to accept that late payments are a fact of life in any line of business. Anything we can do to mitigate this should, however, be done.


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Samuel Murray  Identity Verified
Netherlands
Local time: 02:39
Member (2006)
English to Afrikaans
+ ...
Keep it simple, I'd think Sep 20, 2010


David Turnbull wrote:
What I'm thinking of now is perhaps some sort of accumulating discount. So for the first month in a collaboration I invoice the full price, if that's paid within a medium payment term of e.g. 20 days then you get 1% off next month, which if paid within 20 days gets you a 2% discount in month 3 and so on up until 10% which can continue until a break in invoices.


The problems with a complex discount system include: (a) your client might misinterpret it, which means you have to spend more time explaining it, and if a client expected a discount which he didn't get (even if he was wrong) he would feel slighted, so he'd end up getting a goodwill discount anyway; (b) it is complex to keep track of everything and ensure that each client gets what he deserves.

For this reason I'd stick to a simple system -- easy to manage and easy to keep track of, and simple for the client (even the simpler ones) to understand. My suggestion would be a uniform percentage discount for every early payment.


My way of (at least partly) compensating this would be to increase my rates by say 5% over the next year of our collaboration (perfectly acceptable in line with inflation and increasing experience) while all the time looking for new (higher paying) clients in any case.


Don't rationalise the discount by saying that you'll increase your rate. You never know what the economy is going to do next year. You may end up getting less next year than you're getting this year, and that fact should be kept separate from your early-payment scheme.

Increase your rate, if you want to, but don't try to excuse or explain away the discount with the rate increase. They are separate issues and should be considered separately.


Yes, this would really be designed to cut down on 45 and 60 day payment terms... On the other hand I have some clients who ... always pay a week or two late.


In that case I'd suggest a 5% discount for clients who pay with 21 days (3 weeks) and a 2% discount for clients who pay within 35 days (5 weeks), calculated from the businessday after the date of your invoice. That would be what I would consider a balance between what you get and what you pay for, and what you'd get if you don't pay for it.

Samuel


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Dragomir Kovacevic  Identity Verified
Italy
Local time: 02:39
Italian to Serbian
+ ...
gross value is one thing, discount another Sep 23, 2010


Samuel Murray wrote:

My main question is how one would include the discount on the invoice (how legally (or accountancy compatible) to do it). Do you add it as a line item, e.g. "Minus 2% discount if payment is made before 29 September"? Or do you issue two invoices -- one without the discount and one with the discount (the latter marked as an updated invoice, with the proviso included)? Or do you issue a credit note for the amount of the discount, separate from the invoice? Or do you add the discount to the next job's invoice, as a line item (e.g. "Minus EUR 10.00 discount for early payment of previous invoice")?



[Edited at 2010-09-19 21:11 GMT]


From the fiscal point of view, tax collection on a discounted invoice will be lower; this is not the situation beloved so much by tax administration, a taxable base is decreased, hence less VAT.

Let's imagine a shipment of 1000 tons of high value metal products crossing borders, with an invoice bearing 2% discount for prompt payment, put immediately under the goods' value, which becomes 98% of the effective value, and then VAT added (by Customs) onto it. This would be considered a fraud.

A discount for immediate payment is an alternative option, inserted after all payment clauses, because it is really optional.

D


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Incentivising fast payment







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