Of the concerns shared by almost all businesses, one of the most critical is how to reduce days sales outstanding (DSO) and improve cash flow. This challenge directly impacts the core of business operations—after all, nothing can happen without cash flow. It’s the sort of question that has always kept collections department heads up at night. How can a company change customers’ payment behavior without becoming overly aggressive in collecting those payments?
One proven solution may be surprising – surcharging credit card payments. While surcharging is typically used to reduce the merchant cost of high credit card interchange fees, a strategic, selective approach can also influence how customers pay, shortening payment cycles and unlocking much-needed working capital.
How Selective Surcharging Reduces DSO
At its core, surcharging allows businesses to pass credit card processing fees to those customers who choose to pay with a credit card. But it can be more than just cost recovery. Using a surcharge structure that incentivizes early payments can actively reduce DSO. This approach takes advantage of selective surcharging. Using this concept, companies can target only certain customer types and business units with surcharging while remaining fully compliant.
For example, start by selecting the customer segments where DSO is highest; often, these are on-account customers. Offering a reduced or zero surcharge to on-account customers who pay their invoices within a certain time frame—such as net 10 days—encourages customers to settle their accounts earlier. This, combined with the fast settlement inherent in credit card transactions, speeds up payments.
By making the cost of credit card payments transparent, you’re giving your customers a clear incentive to pay faster, either to avoid the surcharge or to take advantage of a lower surcharge for early payments. This transparency is also appreciated by customers, who will prefer this approach far more than a more aggressive collections strategy.
Alternatively, this may also cause some customers to move away from settling with credit cards, reducing your fees and improving your margins. Either way, you benefit.
Case Studies: Improving Cash Flow with Surcharging
An InterPayments client—a large distributor—faced increasing challenges with long payment cycles. Their average DSO exceeded 45 days, which created cash flow constraints that limited their ability to grow. After partnering with InterPayments to implement a compliant surcharge program, they introduced a simple incentive: customers who paid within 10 days avoided the surcharge entirely, while those paying later incurred a small, transparent fee.
Within the first few months, the results were evident. Not only did the company recover significant fees from late-paying customers, but they also saw an uptick in early payments. Their DSO dropped by 12%, improving their overall cash flow and reducing their reliance on short-term financing. The business was able to reinvest the newly available capital into inventory expansion, driving growth and operational efficiency.
Another InterPayments client in the service industry introduced a surcharge program that incentivized early payments by waiving or reducing surcharges for customers who paid within net 10. The impact was swift: customers who wanted to avoid the surcharge started paying earlier, which resulted in a 15% decrease in their DSO. The increased cash flow allowed the business to expand its services and improve customer satisfaction, all while reducing the burden of credit card processing fees.
Boosting Cash Flow Beyond Cost Recovery
Using a selective surcharge program to influence customer behavior has financial benefits that go well beyond recouping fees. Encouraging early payments through structured surcharges adds a layer of financial agency that can drastically improve cash flow.
As a Managed Surcharge Provider, InterPayments works with you to build the surcharging program that best suits your needs. You don’t have to surcharge all customers – in fact, no InterPayments customers do. Instead, we help pinpoint the parts of your business where surcharging will have the most impact – whether that’s cost recovery, DSO reduction, or both. We then implement and execute that plan, guaranteeing compliance down to a state and local level with indemnification.