This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.
Cash now or cash later?
Many suppliers offer a discount for paying invoices early, written in shorthand such as 2/10 net 30: take 2% off if you pay within 10 days, otherwise pay the full amount within 30 days. It looks like a small saving, but it is actually one of the best returns a business can earn on its cash, or one of the most expensive forms of credit if you skip it.
The formulas
- Discount = invoice amount × discount rate.
- Extra days of credit if you skip it = net days − discount days.
- Annual cost of skipping the discount = discount ÷ (100 − discount) × 365 ÷ extra days.
- Effective annual rate, compounded = (1 + discount ÷ (100 − discount))^(365 ÷ extra days) − 1.
The discount is divided by 100 − discount because if you pay early you only pay 98%, so the 2% is a return on that smaller amount.
Worked example
A $10,000 invoice on terms of 2/10 net 30:
- Discount for paying by day 10: $200, so you pay $9,800.
- Skipping it buys 20 extra days of credit.
- Annual cost of skipping: 2 ÷ 98 × 365 ÷ 20 = 37.24% as simple interest.
- Compounded, the effective annual rate is 44.59%.
If your line of credit costs 8% a year, borrowing to pay early is clearly worth it: you pay about $43 of interest for 20 days to save $200.
Common terms
| Terms | Annual cost of skipping (simple) |
|---|---|
| 1/10 net 30 | 18.4% |
| 2/10 net 30 | 37.2% |
| 2/10 net 45 | 21.3% |
| 2/10 net 60 | 14.9% |
| 3/15 net 45 | 37.6% |
When to take the discount
- When the annual cost of skipping is higher than your borrowing rate or the return on your cash. That is almost always the case for 2/10 net 30.
- When paying early strengthens the relationship with a key supplier.
When to wait
- When cash is very tight and borrowing is not possible: missing payroll or rent costs more than a lost discount.
- When the discount is small and the delay long, such as 1/10 net 60, whose annual cost of about 7% may be below your borrowing rate.
Offering discounts to your own customers
Discounts bring cash in sooner and can reduce collection risk, but they cost you the same high rate from the other side. They make most sense if you would otherwise borrow at a high rate or if late payments are common. Spell out the terms clearly on your invoices, decide how you will handle customers who take the discount after the deadline, and check how the discount affects sales tax with your accountant.