Payment Methods

Cash Discount Program: Definition, Advantages, and Examples

A cashless society seemingly draws closer as consumers have largely quit carrying cash. To remain a competitive business today, you have to accept credit cards. This fact has benefits and drawbacks. While it’s easier to upsell, thus achieving larger average tickets, the cost of processing debit and credit cards can eat into your margins. The average credit card processing fee per transaction can be anywhere between 1.5 and 3.5 percent of your gross revenue.

As a business owner, you may have asked yourself, “Is there a way to accept credit cards, while still maximizing cash sales?” Yes, through cash discounts. Below, we’ll define cash discounts, explain how to implement a cash discount program, and explore the differences between cash discounts and surcharges.

What Is a Cash Discount Program?

A cash discount program is an initiative in which a business rewards customers who pay with cash by way of a discount. It’s essentially an incentive program that encourages your customers to use cash. Businesses all over the country use cash discount programs to encourage as many cash purchases as possible.

By adding the cost of credit cards into the price of each item you sell, and offering a discount to cash users, you can offset the cost of accepting cards at your business. How you define the terms of the cash discount at your business will depend on a few factors. We show you how to calculate a proper cash discount rate further below.

The primary purpose of a cash discount is to maximize the number of cash sales and minimize the number of credit and debit card sales. A customer that has both cash and cards on them will usually opt to use cash if there’s a benefit to doing so.

Are cash discounts legal?

If you’ve looked into methods to offset your credit card processing fees, you may have run into the question of legality. So, are cash discounts legal?

Yes, cash discounts are completely legal in all 50 states. You can always give a customer a discount. Surcharges, on the other hand, are not legal in all states. We explore the differences between cash discounts vs surcharges in the next section.

Cash Discount vs Surcharge

person paying with cash from wallet to get a cash discount

Why is a cash discount legal in all 50 states, but a surcharge isn’t? Let’s explore the differences.

A cash discount is when you offer a discount off of the standard price to customers who use cash. In other words, you’re incentivizing cash purchases.

A surcharge, on the other hand, charges an additional fee above the standard price to your customers who use cards. In other words, you’re disincentivizing card purchases.

While both programs work towards the same outcome, they have opposite approaches. If you live in one of the states that allow surcharging, there are some rules surrounding this practice of which you should be aware.

Beware of surcharge regulations

If you opt to create a surcharge program (in one of the states where it’s legal to do so), there are a few things you’ll need to know. In order to implement a surcharge program you’ll need to:

  • Alert your credit card processor at least 30 days before you implement a surcharge program.
  • Send written notice to the individual card brands (Visa, MasterCard, Discover, etc.) at least 30 days before you implement a surcharge program.
    Note: Each card brand has its own guidelines you’ll need to follow for surcharges.
  • Alert your customers of the surcharge before they pay it. For brick and mortar businesses, you’ll need a posted sign at both the entrance and point of sale. For eCommerce businesses recieving payments online, you’ll need to clarify this on your virtual terminal page.
  • Cap it at four percent. You may not charge a surcharge over your average effective rate or 4 percent, whichever is lower. (In other words, you cannot generate profit from a surcharge.)
  • Differentiate debit and credit cards. Debit cards are ineligible for surcharges. This requires training your cashiers to recognize debit cards so they’re excluded from any applicable surcharges.
  • Add the surcharge as a line item on your receipts. You’ll need to make it clear that a surcharge was added and what that surcharge came out to on each receipt.

Cash Discount Example

To illustrate a cash discount program, let’s go through a cash discount example together. You’ve implemented a 3 percent cash discount program at your business. To keep the math simple, that means that for every $100 purchase made in cash, you discount the purchase by $3.

In this example, you have a customer who browsed your store and gathered a few items for purchase. Their total comes out to $100. You offer them two ways to pay: cash or card.

If they choose to pay with a card, your customer will pay the full $100 and exit your store. Their expectations are met, as they’ve paid exactly what they expected to pay. But if they happened to have cash on them, they can choose to save a few dollars instead and only pay $97, thanks to the three percent discount for cash payment.

A customer who happens to have cash on them is more likely to hand it to you in exchange for the goods to save a few dollars. If they don’t have cash on hand, they’re still paying what they expected to pay.

Why Implement a Cash Discount Program

piggy bank on pile of cash made from implementing cash discount program

Now that you understand what a cash discount is, have gone through an example, and explored the differences between a cash discount and surcharge, we’ll detail the benefits of a cash benefit program. There are a few obvious benefits and a few less obvious benefits that we’ll explore.

The primary purpose of a cash discount is to maximize the number of cash sales. In doing so, you’re also minimizing the number of credit card sales. Here are some of the added benefits of this dynamic:

Increases cash flow

The first benefit is the most obvious: A cash discount program improves your cash flow. By incentivizing cash purchases, you’re naturally going to have more cash on hand, thus cutting down delays between deposits.

With credit card processing, it may take a few days to get your deposits into your account and ready for use. Cash, on the other hand, can be used immediately to pay bills and vendors.

Lowers risk of fraud

A less obvious benefit of a cash discount program is the reduced risk of what is frequently referred to as “friendly fraud.” While a true fraudster isn’t likely to opt for cash instead of a credit card, the risk of friendly fraud, which is essentially an accidental chargeback, is eliminated when a purchase is made with cash.

Your customers will have to make payment disputes with you directly to receive a refund in cash, whereas a credit card offers your customers the option of disputing a payment indirectly (i.e., through their bank instead of your business).

Eliminates credit card processing fees

If your customer doesn’t use a credit card to pay, you won’t have to pay credit card fees on the transaction amount. This means keeping an additional two to four percent of your revenue on every cash transaction. Those dollars and pennies add up, making this one of the best reasons to consider a cash discount program.

In fact, eliminating credit card processing fees is one of the biggest incentives for introducing a cash discount program in your store.

Keeps margins consistent

By properly introducing a cash discount program, you’ll create a buffer around your margin that remains consistent. To continue with the three percent cash discount program example introduced earlier, let’s walk through the setup behind the scenes:

Your cost for Product A (including the overhead and cost of goods sold) is $50. You sell this product for $100. The fees for running this transaction are an estimated $3, leaving your profit margin at:

Credit Card: $100 revenue – $50 Product A cost – $3 average credit card processing fee = $47 profit.

Cash: $100 revenue – $50 Product A cost – $3 cash discount = $47 profit.

Your profit stays the same for both transactions, but with the cash discount formula, you’ve eliminated the use of a card, sped up your deposits, and reduced the fees you pay for credit card processing.

What to Consider Before Offering a Cash Discount

Before offering a cash discount program, there are some considerations to make to ensure this program doesn’t backfire.

Customer perception

While offering a cash discount is a great incentive for cash users, card users may perceive it negatively. There’s a potential that they’ll feel cheated out of a few dollars, which may cost you more in brand reputation than it saves you.


There are fewer (if any) rules for offering a cash discount than for surcharging, but it’s important that whichever path you choose, you apply it consistently. This means that your staff must be well trained on how and when the discount applies.

Reduced transaction size

When incentivizing cash, you may unintentionally disincentivize larger purchases. For example, if you have a customer in your store who was originally going to purchase $100 worth of goods, but they only have $50 worth of cash on them, they may abandon items to fit within their available cash in order to receive the cash discount. This three percent incentive then costs you 50 percent of your revenue on that transaction.


If your business operates online, there is no way to offer a “cash” discount, because it’s impossible to accept cash online. It’s also impossible to accept cash through mobile and contactless payment, two payment methods increasing in popularity among consumers.

As an alternative, you may be able to offer an ACH transaction discount, incentivizing an ACH transaction or bank transfer instead of a credit card purchase. However, implementation of such requires a more in-depth conversation with your credit card processor.

How to Calculate Cash Discount

man paying with cash after learning about a cash discount program

To understand what your cash discount should be, look at your merchant processing statements to review credit card processing fees over the last several months. Make a note of the total amount you paid in fees over the course of each month and the total amount of volume processed by credit card.

For example, imagine you processed a monthly average of $10,000 worth of Visa, MasterCard, and Discover transactions over the last three months. For that revenue, you paid a monthly average of $300 in credit card processing fees.

Your effective rate is $300 in fees ​​÷ $10,000 of revenue = 0.03 or 3.00 percent.

This 3 percent effective rate is what your cash discount rate should be. You don’t want to offer a greater cash discount than your card processing cost. In that case, you’ll lose more through cash payments instead of neutralizing transaction fees as intended.

Once you decide on your cash discount percentage, you can easily calculate the cash discount. You can calculate the cash discounts formula using this simple structure:

  1. Cash Discount = Gross Transaction Amount X Cash Discount Percentage
  2. Customer Payment Amount = Gross Transaction Amount – Cash Discount

How to Record a Cash Discount Payment

Once you’ve implemented your cash discount program, you’ll need to record cash discount payments within your books. To properly execute cash discount accounting, do the following:

Debit the cash account for the total amount your customer paid (i.e., the actual cash received)
Debit a sales discounts expense for the total amount of the cash discount you gave your customer
Credit the accounts receivable account for the full amount (cash + discount)

For example, if your customer paid $97 for a $100 item, you’ll record it as:

A debit of $97 to cash
A debit of $3 to your sales discount expense
A credit of $100 to accounts receivable.

If you have additional questions about cash discount accounting or a more specific accounting question, contact an accountant for advice.

Closing Thoughts: Should Your Business Offer a Cash Discount Program?

A cash discount is a discount for cash payments. It’s a set percentage discount rate offered to customers who opt to pay with cash instead of a credit card. The primary purpose of a cash discount is to reduce credit card purchases and associated costs while incentivizing cash payments. If done correctly, you should be able to offset the costs associated with running credit cards.

While a cash discount program has many enticing incentives to offer you as a business owner, it’s often simpler to just build the cost of processing cards into your prices. This way, there’s no confusion, and your costs are still covered. Especially, that is, as the future of payments seemingly moves further from cash payments as a whole.


  1. The Guardian: Cashless Society Draws Closer with Only One in Six Payments Now in Cash
  2. PaymentCloud: What Is a Chargeback? The Ultimate Guide to Credit Card Chargebacks
  3. NACHA: What is ACH?