A cash discount is a deduction allowed by the seller of goods or by the provider of services in order to motivate the customer to pay within a specified time. The seller or provider often refers to the cash discount as a sales discount. The buyer often refers to the same discount as a purchase discount. The cash discount is also known as an early payment discount.
Not all sellers offer cash discounts, but a common cash discount is 1/10, net 30 and it will appear on the sales invoice. If the invoice is $1,000 and the buyer returns $100 the net amount due to the seller is $900 if paid within 30 days. However, the buyer can deduct $9 (1% of $900) if the buyer pays the seller $891 within 10 days of the invoice date. The seller often records the $9 cash discount as Sales Discounts. The buyer will record the $9 savings as Purchase Discounts or as a reduction to the cost recorded in inventory.
Much like everything in life, credit card processing fees continue to rise. With tight budgets and stiff competition, businesses are ever vigilant in looking for strategies to lower the fees. The need to accept credit cards comes with the heavy burden of various brand fees, aka the swipe fees. These fees range from 1-4% and can significantly impact the bottom line over time. Understanding the difference between a cash discount and surcharge can help you choose if a Cash Discount program is right for your business.
Giving businesses the opportunity to accept non-cash payments at significantly reduced fees is a gaping hole of opportunity that entrepreneurs are aggressively seeking solutions for. One solution to this opportunity is the cash discount program, which was federally authorized in all 50 states in 2011. The confusion with this opportunity lies with the wide interpretation of what cash discounting is and how it differs from surcharging.
To educate you on what is acceptable and legal we need to understand the differences between a cash discount and surcharge program. Only after you understand the differences will you be able to make an educated choice on what you should consider when evaluating a cash discount solution.
Surcharging
Surcharging is the process in which a business owner adds a fee to a transaction to cover the cost of credit card processing for the business. As an example, the pizza shop sells a pizza for $10. When the customer pays for the pizza with their credit card, the bill is wrung up as $11.50. ($10 for the pizza and $1.50 for the surcharge) Currently there are 40 states that allow surcharging to customers that pay with credit card. The states that prohibit surcharging are Texas, Oklahoma, New York, Massachusetts, main, Kansas, Florida, Connecticut, Colorado and California. The surcharge is a fixed percentage of the overall price before taxes are assessed. Surcharging is not allowed on debit cards.
Cash Discounting
When the merchant offers a lower price for the use of cash, this is a cash discount. Cash discounts differ from the credit card surcharge as it is not an additional fee added to the credit card transaction.
The Durbin Amendment (as part of the 2010 Dodd-Frank Financial Reform Act) gives the most succinct definition of cash discounting. It states that businesses are permitted to offer a discount to the consumer as an incentive/encouragement for customers to pay by an alternate method other than credit/debit cards. Alternative methods include cash, checks and gift cards that are applied to the transaction at the time of sale.
The cash discount works by applying a customer service fee, in the form of a fixed amount or percentage, on all customer transactions. This fee is removed if the customer pays with cash, check or gift card. Technology that automatically determines the service fee or discount amounts by payment type are mandatory. For a cash discount program to be legal it must present a clear receipt detailing the service fee or cash discount amount.
The technology provider collects/escrows the service fees and then pays off the credit card charges on behalf of the merchant, essentially removing the need for any back-end accounting or complex statements. The statements from the technology provider show a dramatic reduction in credit card fees along with a modest monthly fee to pay at the end of the month.
State laws vary widely with respect to surcharge programs. At the time of this article, there has yet to be any direct language prohibiting a merchant implementing a cash discount program if consumers are notified prior to purchase.
Occasionally some service providers allow a cash discount if their fee is paid at the time of the service. For example, my dentist allows a cash discount of 5% to patients without insurance if they pay on the day of the service. This cash discount saves the time and cost of billing, mailing statements, receiving partial payments, and can result in the dentist having more cash and less receivables.
Cash Discounting Program SwyftPAY Minnesota – Permanently lower your processing fees using cash discounting. Your customers will enjoy the benefit of the optional lower cash price and you will enjoy the benefit of more cash in your till at the end of the month. With many different Cash Discount Programs now available in the marketplace, it is important to know what programs are legal and effective. Cash Discounting from SwyftPAY is a Visa Approved, patented technology that is fully compliant with all state laws. To get the right information to make the best decision for your business, call us today 888-256-8917.
