How Stuff Works: The Difference Between an Early Payment Discount and Rate
February 25, 2021 |
There are two different types of offers you can make to receive early payment on the C2FO platform. Here’s what you need to know.
At C2FO, we’re dedicated to one all-consuming goal: helping your business grow. And we’re committed to helping you understand how our working capital solutions actually work — in layman’s terms — so that you’re always in a position to maximize your working capital.
This article is the first in a series titled, “How Stuff Works,” which will provide an introduction to C2FO’s vernacular, explain how we operate, provide tips on how to use our platform, and much more.
First up: everything you need to know about the difference between an early payment discount and rate.
With C2FO, you have the option to place two different types of offers to get invoices paid early from your customers — a discount offer or an Annualized Percentage Rate (APR) offer. Although both options ensure you get paid early, there are some distinct differences and advantages to each.
Below, you’ll find the ultimate guide to selecting a discount or APR offer on your invoices.
What’s the difference?
A discount offer will apply a flat rate of discount to each of your available invoices. When you select this option, the discount amount is the same for every invoice, regardless of when it is due to be paid. That’s because a discount offer takes the percentage rate you enter and simply applies it to each of your invoices:
An APR offer will use an annual percentage rate to calculate an individual rate of discount for each invoice, depending on how early you are getting paid, or by days paid early (DPE), as we refer to it on your C2FO account.
On the C2FO platform, your APR rates fluctuate and are calculated by the number of days paid early on each invoice. Opting to discount via the APR format allows you to offer lower discounts if your invoices are near their original due dates.
For example, if you choose an APR of 12% on two different invoices, the rate of discount would differ for each one, depending on the DPE. At a 12% APR, a $10,000 invoice paid 30 days early would have a discount of $100, or 1.00%, while a $10,000 invoice paid 10 days early would have a discount of $30, or 0.30%.
Which offer type should you choose?
Both offer types will accelerate your invoices for early payment. However, there are a few things to consider before you choose which is best for you.
Discount offers are:
- Easier for accounting
APR offers are:
- Easier to compare to the cost of borrowing or other alternative funding sources (like a bank program)
- Can result in a lower overall cost when you have multiple invoices with a wide range of payment dates
To put it simply, you can use APR when you want to evaluate pricing on a yearly basis or directly compare to an alternative funding source. You can choose a discount offer when you’re looking to achieve a short-term liquidity objective.
How does the algorithm work?
C2FO’s proprietary algorithm operates on the price discovery model, which creates a seamless match between accounts receivable and accounts payable to dynamically price the value for early payment in real time.
In other words, C2FO technology facilitates collaboration to create a win-win between you and your customers.
The bottom line
No matter which option you choose, our dedicated team is here to help you optimize your working capital. For more information on discounts, rates or other questions, reach out to your supplier relationship manager directly.
If you’re new to C2FO and want to learn more about how we can help you take control of your cash flow, visit https://www.c2fo.com/amer/us/en-us/for-vendors.