Early settlement discount

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

An early settlement discount gives a customer a percentage off the invoice for paying sooner than the agreed terms — 2% for paying in ten days rather than forty, say. Giving up 2% to be paid thirty days sooner is borrowing for thirty days at about 2%, which over a year comes to roughly 25%, dearer than almost any bank facility. A lender also reads it as a tell: debtor days that improve because of a discount have been bought rather than earned, and the cost sits in the margin line.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.