Early payment discounts are widely used in Germany: businesses offer them as a way of encouraging fast payments and increasing their liquidity. But there are also tax and administrative rules you need to consider when granting or deducting an early payment discount.

This article will tell you what an early payment discount is, how it differs from a sales discount, and what advantages it offers. We’ll also answer some of the most frequently asked questions on the subject, and give you a couple of concrete examples to show you how to get your calculations right.

What’s in this article?

• What is an early payment discount?
  
• What is the difference between a sales discount and an early payment discount?
  
• What are the benefits of offering an early payment discount?
  
• How much of a discount can businesses in Germany offer for early payment?
  
• Calculating an early payment discount: Examples
  
• Frequently asked questions on early payment discounts
  

What is an early payment discount?

An early payment discount is a reduction of an invoice total that is contingent on the invoice in question being paid by a certain deadline. If payment is made on time, customers can deduct the agreed percentage from the invoice total. Early payment discounts are indicated as percentages, and typically appear on invoices as “3% discount for payment within 14 days,” or something similar.

Businesses in Germany can grant early payment discounts to their customers or receive a discount of their own from their suppliers. A customer discount is a cost factor for a business, reducing its sales revenue (see Section 277.1 of the German Commercial Code [HGB]). A supplier discount, on the other hand, reduces a business's costs of acquisition or production (see Section 255.1 of the HGB).

What is the difference between a sales discount and an early payment discount?

Sales discounts and early payment discounts are classic pricing tools. Both involve reducing the price of something—the difference lies in their business function and what triggers them.

As the name suggests, a sales discount is usually factored in during a sale or upon conclusion of a contract. Typical examples include volume discounts for large orders, loyalty discounts for long-term partners and loyal customers, or special discounts offered as part of a sales drive or marketing campaign. This reduction in price affects the invoice total directly, and is not contingent on specific conditions, like timing of payment. Sales discounts are therefore used, first and foremost, as sales and marketing tools. They are intended to encourage sales, strengthen customer loyalty, and make people more inclined to buy.

Early payment discounts, on the other hand, apply only if an invoice is settled by a certain deadline. Instead of being factored in during a sale or upon conclusion of a contract, these discounts are deducted from the invoice total retroactively. Unlike a sales discount, which aims to increase turnover, early payment discounts are used largely for managing a business’s finances and liquidity. Early payment discounts help motivate customers to settle their outstanding accounts as quickly as possible.

What are the benefits of offering an early payment discount?

The benefit of an early payment discount for customers is obvious: they pay less if they settle their invoice by the agreed deadline. The customer savings potential here is enormous, especially with large invoices. But it’s not just customers who benefit—there are also advantages for businesses that offer early payment discounts.

Improved liquidity

As a business, the biggest argument in favor of early payment discounts is that you get paid fast. This can help strengthen your liquidity and reduce the likelihood that you’ll run into trouble with your payables, like supplier invoices or payroll. This can give you a major competitive edge, especially in industries with small margins or long payment terms.

Reduced risk of default

The faster outstanding receivables are settled, the less likely it is that a debtor will default. By granting early payment discounts, businesses are motivating their customers not to leave their invoices unpaid until the last minute. This reduces the risk of default and dunning.

Predictable costs

While an early payment discount is a cost factor for the invoicing company, it’s a cost that’s easy to predict. This often makes an early payment discount a more affordable option for avoiding short-term liquidity shortfalls than taking out bank loans, for example.

Greater customer loyalty

Early payment discounts are an attractive benefit for customers, as they can lower invoice totals substantially. This financial incentive doesn’t just increase customer satisfaction, it also strengthens loyalty to a particular business. Customers who have two companies to choose from when looking to buy a product might be more likely to choose the one offering an early payment discount.

Competitive edge

In hotly contested markets, businesses use early payment discounts as a marketing tool. Cutting your prices signals to your customers that you’re not just flexible, you’re also fair. For small and medium-sized enterprises, in particular, this is an easy way to make yourself more attractive than your competition.

How much of a discount can businesses in Germany offer for early payment?

There are no statutory regulations on early payment discounts in Germany, with neither the HGB nor the BGB (German Civil Code) stipulating fixed caps. Theoretically, businesses can offer a discount of any amount they want. In practice, though, standard early payment discounts range from 2% to 5%—high enough to motivate customers to pay quickly, but not so high that it causes the invoicing company to suffer. How much of a discount is offered depends on a range of factors, such as the industry, competitors, the business’s liquidity, and the margins calculated.

Companies also have the option of offering tiered discounts. This means that customers get a higher discount for very early payments, while payments that arrive later receive a lower discount or even no discount at all. For example, a business might offer a 5% discount for payment within 14 days of invoicing and a 2% discount for payments made within 15 to 30 days of invoicing. Once this deadline passes, there is no discount.

Calculating an early payment discount: Examples

Businesses in Germany use the following formula to calculate early payment discounts:

Discount = Invoice Total x Discount Rate

The early payment discount is usually applied to the gross invoice total in euros. Digital solutions, such as Stripe Invoicing, help companies calculate early payment discounts automatically. With Invoicing, businesses can easily accept payments worldwide and send invoices online with just a few clicks. Automating the invoicing process speeds up bookkeeping workflows and reduces the risk of calculation errors that can occur when applying tax rates, sales discounts, or early payment discounts.

Calculating an early payment discount: Example 1

A company receives an invoice from an external marketing agency for €1,200 net. Value-added tax (VAT) of €228 is added to this amount for a gross total of €1,428. The agency offers an early payment discount of 3% for invoices settled within 10 days.

Here’s how this discount is calculated:

€1,428 x 0.03 = €42.84

Because the discount rate is applied to the gross amount, it proportionately reduces both the net amount and the VAT due:

• Net Amount: €1,200 x 0.03 = €36
  
• VAT: €228 x 0.03 = €6.84
  

The amount due less the discount is therefore:

• Net Amount: €1,200 - €36 = €1,164
  
• VAT: €228 - €6.84 = €221.16
  
• Gross Total: €1,385.16
  

That means a net savings for the company of €36. If the business is eligible for an input tax deduction, then the reduction in VAT is merely a transitory item.

Calculating an early payment discount: Example 2

A business supplies a customer with goods worth €5,000 net. The business grants an early payment discount of 2% for payments made within 14 days. The regular payment term is 30 days. The VAT due is €950, giving a gross total of €5,950.

Here’s how this discount is calculated:

€5,950 x 0.02 = €119

Because the discount rate is applied to the gross amount, it proportionately reduces both the net amount and the VAT due:

• Net Amount: €5,000 x 0.02 = €100
  
• VAT: €950 x 0.02 = €19
  

The amount due less the discount is therefore:

• Net Amount: €5,000 - €100 = €4,900
  
• VAT: €950 - €19 = €931
  
• Gross Total: €5,831
  

That means a net savings for the customer of €100.

Frequently asked questions on early payment discounts

Below, we answer some of the most frequently asked questions about early payment discounts.

What’s a normal amount for an early payment discount?

In Germany, early payment discounts on business invoices are generally around 2% to 3% of the invoice total. Occasionally, companies offer higher discounts of up to 5%. Discounts of more than 5% are pretty unusual.

Do early payment discounts apply to the gross or net total?

In Germany, early payment discounts are generally applied to the gross invoice total, meaning the total inclusive of VAT. This means that both the net total and the VAT due on that amount are reduced proportionately.

What effect do early payment discounts have on input tax?

Businesses eligible for input tax deductions reduce their deductible input tax by the amount of discount granted. VAT is only due on the invoice total actually paid. The business can claim this total as input tax. The accounts team will usually make this adjustment automatically, provided the discount is posted correctly.

How are early payment discounts posted in terms of VAT accounting?

When posting an early payment discount, businesses reduce the net invoice total and the amount of VAT due on that amount proportionately. With accrual-based taxation, VAT is incurred in the interim reporting period in which the service is rendered, regardless of date of payment. If the early payment discount is used at a later time, the company must correct the VAT for the period in which the payment is made. With cash-basis accounting, VAT is incurred in the period in which the payment is actually made. It is only charged on the amount transferred, which means that there is no need for corrections.