If the customer has adequate cash or a readily available line of credit, the 1% early payment discount for paying 20 days early equates to a very attractive annual return of approximately 18%. If the customer does not have cash or a credit line available, the early payment discount may be small compared to a bank overdraft fee.
The early payment discount is also referred to as a prompt payment discount or cash discount. The seller often refers to the early payment discount as a sales discount, while the buyer may refer to the early payment discount as a purchases discount.
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