Q: I own a small business and have several large corporations as customers. One corporation offers payment in 15 days with a 2.5 percent discount or in 30 days with a 2 percent discount. I have opted for the 2 percent, 30-day deal. When I receive the check, however, I note they take a discount not only on my merchandise but on my sales tax and delivery charges. I was told when I objected to the tax and delivery deductions that the discount is taken from the gross amount. I don’t think this is right—am I wrong?
—S.C., Otsego, Mich.
A: If you’ve agreed to an early-payment discount, it is standard for your client to take the discount on the total invoice amount, experts say. This is likely to extend the discount to the shipping and any other charges you may include. Unless you are selling on a retail basis to your large corporate customers, your invoice should not include sales tax, but even taxes are typically included in these kinds of discounts.
Since a payment discount is a private agreement between you and your regular customer, you can certainly try negotiating the terms with them, says Stephen Paul Dem, a business attorney in Encino, Calif., who specializes in debt collection matters.
“A discount for early payment is a contract issue between a company and a purchaser of its goods. You could tell them that you’ll grant them their discount, but it will be on merchandise only, with shipping charges excluded. Or you could negotiate to get a better deal—guaranteed 15-day payments, say, for a 2 percent discount,” he says.
You could also ask customers for net-30-days payment, with no discounts, and even include interest charges if their payments show up late. (Typically, some kind of a grace period is standard with these kinds of terms.)
“Usually, if somebody’s going to take a discount, they have to pay faster than the standard 30 days,” Dem says. “It’s likely that you, like other small business owners, caved to this customer because of the economics of dealing with a big corporation—and you want the business.”
When small companies do a lot of their business with one or two corporate clients, they often find themselves at a disadvantage in negotiations. Think about how important this customer is to your business, how much leverage you have with them, and whether you can work to modify the current payment terms without jeopardizing the relationship.
“Your burden is to decide how you want to position your company with your bigger customers and then hold your ground,” Dem says. “Normally the arrangements are in the hands of the big buyers, not the sellers.”
It’s always a good idea to have credit clients sign purchase agreements that include background checks and spell out payment terms. Make sure yours lets customers know what recourse you will take if payments come in late—or not at all.