Payment terms are a hidden discount: what extra credit costs

Your price list says one thing and your invoice says another. The difference is often the payment term, and it works like a discount that never appears on the quote.

1. The problem: a discount nobody priced

When a customer asks for 60 days instead of 30, most owners treat it as a courtesy. It is a cost. For those extra days you fund the customer's stock or project with your own cash, or with an overdraft.

The cost is easy to see once you write it down. Take an invoice of £100,000 and an assumed financing cost of 8% a year (illustrative figures). Each 30 days of extra credit costs about £658. If the order earns a 5% net margin, that is £5,000 of profit, and one extra month of credit has quietly removed 13% of it. Two extra months remove more than a quarter.

2. Why it matters more right now

The pressure is not only on the invoice. The Office for National Statistics reports that producer input prices rose 6.1% in the year to August 2026, while factory gate (output) prices rose 3.7% (ONS). Where costs rise faster than selling prices, margin is already thinner before any credit is granted.

Money is not cheap either. The Bank of England held Bank Rate at 3.75% in September and noted that energy prices remain volatile (Bank of England). Your own borrowing cost will usually sit above that, which is why the financing assumption above is a sensible test rather than an extreme one.

There is also a legal point. GOV.UK states that business payment dates must usually be within 60 days, and that a longer period is possible but must be fair to both businesses (GOV.UK). Terms are negotiable, so they should be priced.

3. The solution: treat credit days as part of the price

The principle is simple: the price of an order is the price on the invoice minus the cost of waiting for the money. Compare customers on that basis, not on gross margin alone.

Tips and tricks for this week

• Price a day. Credit-day cost = invoice value × annual financing rate × days ÷ 365. Keep the number beside every quote.
• Use actual days, not agreed days. A customer on 30-day terms who pays in 55 is a 55-day customer.
• Build one table. Customer, agreed terms, actual days to pay, margin after financing. Sort it by the last column.
• Offer two options. Shorter terms at the quoted price, or longer terms at a price higher by the cost you calculated.
• Hold terms for thin-margin customers. Where margin after financing is close to zero, do not extend further.

4. Why the principle holds

Pricing money over time is standard finance practice. The same logic sits behind the public rules on late payment: GOV.UK allows businesses to charge interest and claim recovery costs when payment runs late, which confirms that delay has a recognised price (GOV.UK). Doing the sum yourself, before the invoice is issued, simply moves that logic to the start of the relationship.

The next ONS producer price release is due on 21 October. If input prices have risen again, the table above will show which customers can no longer carry their terms. A Business Health Check can show the same view across your whole customer base.