Problems with customers taking unearned discounts? Here are six strategies to prevent customers from paying late and taking the discount:

Editor's Note: This article originally appeared in the Credit & Collection Manager's Letter, which Credit Today purchased in 2006.

1. Dispel the standard practice myth. Some customers believe unearned discounts are standard industry practice. Contact trade associations and find out if this is true. If not, tell customers and insist they stop taking unearned discounts. If discounts are standard practice, and you want to discourage them, try one or more of the remaining strategies.

2. Explain how your product or service is better than the competition. If you stop allowing customers to take unearned discounts, you run the risk of losing their business. So you need to remind customers just what they would be losing by switching to the competition.

3. Explain policy changes. If you have accepted unearned discounts in the past, you'll have to explain why you allowed them and why it is no longer acceptable. Part of your explanation should imply that if the customer continues to take unearned discounts, it will risk its position with your organization. You might say, We will be introducing a revolutionary new product line in the future, and we will be giving preferential and early sales to our customers who are in good standing.

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4. Let them set the terms. If you allow customers to set their own terms, they will be more likely to adhere to them. Let's say your terms are net 30, 1% 10 days. However, a customer wants net 30, 1% 15 days. If you agree, you not only have the sale, but the customer is less likely to try to take unearned discounts when paying after 15 days.

5. Make your forms clear. Put your credit terms on your company's proposals, order acceptance forms, and invoices, including the fact that you do not allow unearned discounts. You may even want to add that if customers do take unearned discounts, it may lead to intercession by a third party.

6. Refuse to sell to customers that take unearned discounts. You run the risk of losing these customers but, if handled properly, they will return with new loyalty--willing to follow your stated terms.

James T. Herst is founder of Performance Source, Inc., a consulting firm and collection agency that specializes in credit and collection management and personal contacts by attorneys to recover slow-pay and delinquent accounts without customer alienation. Educated at the University of Southern California, Herst also serves as a consultant on cash-flow strategies. He writes, speaks, and holds regular group workshops on credit techniques. If you would like specific examples of the six strategies in action, you can write to me at Performance Source, P.O. Box 1905, Highland Park, Illinois, 60035-7905; or fax your request to (773) 205-8000. Ask for: Six Steps to Recovering Unearned Discounts.