When it comes to debt collection, early payment refers to a situation in which a debtor chooses to pay off their outstanding balance before the due date or before it has been sent to a collection agency. The decision to make an early payment on debt should be carefully evaluated by both the borrower and the collector, as it may come with a range of potential benefits and drawbacks.

This article will explore the pros and cons of early payment for both parties, providing a comprehensive understanding of the matter.

Pros of Early Payment for Creditors

If your debtors are paying their invoices and debts early, there are a number of benefits that this can have for your business, including:

Quicker resolution of debt and faster turnover of accounts

When a debtor makes an early payment, it can mean a quicker resolution of the debt, which in turn can lead to a faster turnover of accounts for the creditor. This allows them to focus on collecting from other delinquent accounts, potentially increase their overall collections and also to be able to place their focus elsewhere in the business.

Reduced workload and administrative costs

With an early payment, the debt collector may not have to spend as much time and resources on the account, resulting in a reduced workload and less labour required to manage the account, which further results in lower administrative costs.

As a business, it’s important to try to reduce costs where possible.

Potential for increased overall collections and profits

If the debtor is willing to pay more than the minimum amount due, the debt collector may be able to negotiate a higher settlement amount, which could lead to increased overall collections and profits. Additionally, if the early payment enables the debt collector to move on to other accounts.

Keep in mind that while the above are some of the potential benefits of early payment, it’s not always a guarantee and it’s important to evaluate the situation on a case-by-case basis to determine whether early payment is a viable option.

Cons of Early Payment for Debt Collectors

While early payment means you’ve got the money sooner than expected, there are some potential downsides to early payments.

Possibility of reduced overall profits

In some cases, a debtor may be willing to make an early payment but may also try to negotiate a lower settlement amount. It’s common for businesses to offer their debtors a discount for early settlement. This can often mean that your invoice is prioritised by the debtor and result in your faster payment, however this could lead to reduced profits for the debt collector.

Uncertainty of early payment

Early payment is not always a guarantee and it can be difficult to predict when a debtor will be willing to make an early payment or if they will even offer one. This can make it challenging for debt collectors to plan and budget accordingly.

Difficulty in management of account and cash flow

While an early payment is arguably more advantageous than not, if you do not have a robust accounts process in place, this could lead to a mismanagement of funds and budgeting. An early payment may make you think you have increased profits for a period, however, the payment was potentially expected in another period which may mean that your expected return in the coming months is lessened. It’s important to be aware of the ramifications of the early payment and to budget accordingly.

Pros of Early Payment for Debtors

Settling your debts early can have amazing benefits if you owe money. Some of these benefits include:

Opportunity to resolve debt and avoid negative consequences

By making an early payment, a debtor has the opportunity to resolve their debt and avoid further collection efforts, which can save them from negative consequences such as damage to credit score. This can provide peace of mind and help to avoid additional financial stress.

Potential to negotiate a lower settlement amount

In some cases, debtors may be able to negotiate a lower settlement amount if they are willing to make an early payment. This can provide an opportunity for the debtor to pay off the debt at a more manageable rate, and to potentially save money in the long run. Some businesses may even offer a discount rate for an early payment too.

While early payment can have its benefits for debtors, it’s important to carefully evaluate the borrower’s financial situation and make sure that the early payment is affordable for them and won’t put them in a harder situation.

Cons of Early Payment for Debtors

While getting the debt off your plate is an incentive to make early payments, there are some possible downsides of making early payments.

Risk of financial strain

Making an early payment on debt can requires a debtor to dedicate a significant portion of their funds to pay off the debt, which could lead to financial hardship if they don’t have enough savings or if they are living paycheck to paycheck. This might put them in a difficult financial situation and make it hard for them to afford other necessary expenses.

Potential for unfair settlement offers

There may be instances where an early payment of the debt actually results in a penalty fee for the debtor. For example, if you have agreed to a contract or payment plan where you pay off the money over a certain period of time, paying it early might attract a fee because the payment plan was designed to provide the creditor and the debtor with some benefits. Often these benefits are that the creditor will receive a certain amount of interest over a set period of time, which can make planning and understanding their profitability easier. For the debtor, these benefits are usually a lower interest rate. If you pay early, you might be hit with a fee to somewhat make up for the advantages you have gotten and that the creditor is losing.

Let’s Wrap it Up

When it comes to debt collection, early payment can be a viable option for both for those collecting debts and debtors. However, it’s important to understand that this decision comes with a range of potential benefits and drawbacks.

Whether it’s creditor or debtors, each party should carefully evaluate their own situation before making a decision on early payment, weigh the potential pros and cons, and make sure that the decision aligns with their best interest.

If you’re a small to medium sized business in Australia and you’re having issues with clients paying you or you need help in managing your credit properly, get in touch with us here at JMA. We’re a leading debt collection and credit management company in Australia helping businesses to manage their processes and collect their debts.

Call us on 1300 664 223 or get in touch online here.