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What Is a Cash Discount?

A cash discount is an incentive that is offered to buyers so that the seller can entice them to do more business. Everyone loves a discount, and those who buy in bulk or transact business on a regular basis with a particular company tend to get more incentives than others. This is exactly how a cash discount works.

There are various ways by which a cash discount can be offered to buyers. The more traditional way is for the seller to offer a lower price if the buyer pays earlier than the due date. Usually, the set up is that the buyer has a certain period of time wherein he can pay for the goods or services that he purchases. This period can be anywhere from weeks to months, depending on the terms agreed upon. At the end of this period, the full amount must be paid to the seller. The cash discount comes into the picture if the buyer is able to pay off the full amount before the end of the period. The seller often includes this discount - expressed in percentage usually - in the contract.

In many cases, a seller may offer payment options other than cash. Credit cards and checks are the most common alternative modes of payment. In most cases, sellers prefer cash payments to the alternative modes of payment, though. As an incentive for the buyer to pay for the goods or services purchased in cash, the seller may offer a lower price. This is, again, another form of a cash discount.

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