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QuickBooks 2013 For Dummies by Stephen L. Nelson, MBA, CPA

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The Second “Most Expensive Money You Can Borrow” Formula

You know that “most expensive money you can borrow” stuff that I talk about in the preceding section? The very tragic flip side to that story occurs when you offer your customers an early payment discount, and they take it. In effect, you borrow money from your customers at the same outrageous interest rates. For example, if customer Joe Schmoe gets a 2 percent early payment discount for paying 20 days early, you, in effect, pay ol’ Joe roughly 2 percent interest for a 20-day loan. Using the same formula I give for the first “most expensive money you can borrow” formula, the rate works out to 37.24 percent.

tip.eps In some industries, customers expect early payment discounts. You may have to offer them, but you should never offer them willingly. You should never offer them just for fun. Borrowing money this way is just too expensive. A rate of 37.24 percent? Yikes!

remember.eps Let me also offer a rather dour observation. In my experience, anytime someone offers big early payment discounts — I’ve seen them as big as 5 percent — he’s either stupid or desperate, and probably both.

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