What is a Trade Discount?

Also known as trading discounts, a trade discount is a situation in which some type of price reduction is extended by a seller in exchange for the buyer agreeing to pay for the purchase within a specified period of time. A trade discount may be applied to the purchases of goods or services from a supplier, the acquisition of investments via a broker or a dealer, or retail sales that occur between a retailer and a consumer. In the event that the buyer fails to remit payment within the specified time frame, the discount is normally declared null and void, and the amount due adjusted to reflect the standard or list price of the products purchased.

With the sale of products from a supplier to a buyer, the trade discount may be offered as a means of encouraging the buyer to settle the balance of the invoice as quickly as possible. In some instances, the discount may be structured as a percentage off the published price, with the discount changing as more time passes. For example, the buyer may apply a five percent discount if the invoice is paid within five working days of issue, two percent if paid between six and ten days after the issue date, and one percent if paid eleven to fifteen days after the invoice date. Should the invoice remain open after fifteen days, no trade discount of any kind is applied to the balance, and the buyer owes the standard price for the products ordered.

The same general approach may apply to the acquisition of securities. If the investor buys on margin, the brokerage may provide some type of trade discount if the amount of the margin is paid off within a specific period of time after the trade order is executed. Should circumstances not allow the investor to retire the debt obligation within that time frame, he or she will be liable for paying the agreed upon market price, plus any standard brokerage fees that apply to the transaction.

Even small retailers may choose to extend a trade discount to consumers or other small businesses within the area. For example, a local butcher shop may provide prepared meat products to a local restaurant, extending a trade discount if the restaurant pays for the meat within twenty days, rather than the standard thirty days. The discount may be a specific dollar amount, or be calculated as a percentage of the total cost of the order. If the restaurant does process the payment in less than twenty days, the discount is deducted from the amount remitted to the butcher.

A retailer may also choose to extend a trade discount to special customers who tend to buy in larger quantities, or to local charities that operate on shoestring budgets. In both instances, buyers receive the benefit of paying less for the same amount of products, while the sellers benefit from receiving payments in a shorter time frame, a situation that tends to increase the efficiency of the company’s cash flow.