Is a 2/10 net 30 discount worth it? Both sides of the maths

A 2/10 net 30 early payment discount reads like small change: 2% off if you pay within ten days instead of thirty. It is not small change. Twenty days of credit for 2% of the invoice works out to roughly 37% a year — a rate no treasury department would sign for. That number decides the question for buyers. It also explains why sellers should be far more careful about offering these terms than they usually are.

Early payment discount (2/10 net 30)

A price reduction offered for paying an invoice ahead of its due date. "2/10 net 30" means take 2% off if you pay within 10 days; otherwise the full amount is due in 30 days. The discount is effectively the price of 20 days of trade credit.

The annualised cost formula

The discount is a fee for keeping your money longer. To compare it against a loan, annualise it.

                     discount %              365
Annualised cost =  ───────────────  ×  ──────────────────
                   100 − discount %    net days − discount days

2/10 net 30:  (2 ÷ 98) × (365 ÷ 20) = 0.020408 × 18.25 = 37.2%

Two details in that formula matter. The denominator is 98, not 100, because the discount is 2% off a price you would otherwise pay in full — you are giving up $2 to keep $98, not to keep $100. And the period is 20 days, not 30, because paying on day 10 versus day 30 buys you 20 extra days, not thirty.

If you prefer a compounded effective annual rate, (1 + 2 ÷ 98) raised to the power of 365 ÷ 20, minus 1, gives about 44.6%. The simple version is the market convention and it is the more conservative of the two, so it is what the table below uses. State your convention when you quote a figure; the two answers differ by seven percentage points and both are defensible.

The buyer's side: a $250,000 invoice

You have a $250,000 invoice on 2/10 net 30. Your revolving credit facility costs 9% a year. You have headroom on the facility.

Discount if paid on day 10:  250,000 × 2%  = 5,000
Amount you would pay:        250,000 − 5,000 = 245,000

Cost of funding 245,000 for the 20 days you gave up:
  245,000 × 9% × (20 ÷ 365) = 245,000 × 0.0049315 = 1,208.22

Net gain from taking the discount: 5,000.00 − 1,208.22 = 3,791.78

A net $3,791.78 on one invoice, for a decision that takes no negotiation. Work out the rate at which you would be indifferent: $5,000 = $245,000 × k × 20 ÷ 365 gives k = 37.2% — the same figure the formula produced, which is the point of the formula. Your funding would have to cost 37.2% before declining made sense.

Scale it to a programme. Suppose $3,000,000 of annual spend sits with suppliers offering 2/10 net 30.

• Discounts captured: $3,000,000 × 2% = $60,000 a year
• Extra cash tied up: $2,940,000 × 20 ÷ 365 = $161,096 on average, all year
• Cost of carrying it at 9%: $161,096 × 9% = $14,499 a year
• Net benefit: $60,000 − $14,499 = $45,501 a year

The buyer's decision rule

Take the discount when its annualised cost exceeds your marginal cost of funds and you have the liquidity to pay early. Both conditions matter, and the second one is where real companies get stuck.

Marginal cost of funds means the rate on the next dollar you would actually borrow, not your weighted average cost of capital. If the revolver is drawn to the limit, the marginal cost is not 9% — it is whatever you cannot do because the cash went out on day 10. Three situations where declining a 37.2% discount is the right call:

1. 1.You are liquidity-constrained. If paying early means missing payroll, delaying a supplier who has you on credit hold, or breaching a minimum-cash covenant, the discount is unaffordable at any implied rate. Availability beats arithmetic.
2. 2.The cash has a better use with a higher return. Rare above 37%, but it happens — funding inventory for a season that turns four times at 15% gross margin can beat it.
3. 3.The invoice is disputed or the goods are not verified. Never accelerate payment on something you might need to negotiate. The 2% is not worth losing your only leverage.

One operational trap: paying on day 14 and deducting the discount anyway. You have then lost the discount (the supplier will rebill it), paid 16 days early, and annoyed the AP contact. If you are going to take discounts, the payment run has to be reliable enough to hit day 10 — otherwise do not take them at all. Check your working-capital headroom first with the working capital calculator.

The seller's side: what offering the discount costs

Flip the invoice over. Now you are the one giving up 2% to get paid 20 days sooner, and the arithmetic usually goes against you — because you are financing a discount at 37% annualised in order to save funding costs at your own, much lower, rate.

A distributor invoices $500,000 a month on net-30 terms, all on credit, and has a DSO of 42 days. It offers 2/10 net 30. Forty per cent of invoiced value takes it: $200,000 a month, or $2,400,000 a year. Cost of capital is 9%.

Discount given away:  2,400,000 × 2% = 48,000 per year

Receivables from those customers BEFORE:
  (2,400,000 ÷ 365) × 42 days = 6,575.34 × 42 = 276,164

Receivables from those customers AFTER (98% of value, paid on day 10):
  (2,352,000 ÷ 365) × 10 days = 6,443.84 × 10 =  64,438

AR permanently released: 276,164 − 64,438 = 211,726
Value of that cash at 9%: 211,726 × 9%     =  19,055 per year

Net result: 19,055 − 48,000 = −28,945 per year

The distributor is paying $48,000 a year to release $211,726 of cash once. That cash is worth $19,055 a year at its cost of capital, so the programme loses roughly $28,945 every year it runs.

The seller's decision rule

Break-even cost of capital = annual discount cost ÷ AR permanently released
                           = 48,000 ÷ 211,726
                           = 22.7%

For a quick screen without building the balances, the buyer's formula shape works with actual days accelerated in place of nominal terms: (2 ÷ 98) × (365 ÷ 32) = 23.3%. That is slightly high because the cash arriving early is 98% of the invoice, not 100% — the exact calculation above gives 22.7%. Either is fine for a go/no-go decision; use the exact one in a paper for the CFO.

Offer the discount only if your cost of capital exceeds that break-even rate. At 9% against a 22.7% bar, this distributor should not offer 2/10 net 30. Note why the seller's bar (22.7%) sits well below the buyer's headline rate (37.2%): the seller's customers were paying on day 42, not day 30, so the discount buys 32 days of acceleration rather than 20. Always compute the seller's side from observed payment behaviour, not from the printed terms — that difference is worth 14 percentage points here.

When offering a discount does make sense

• Your cost of capital is genuinely high. A business funding itself on invoice finance or asset-based lending at 20–30% can clear a 22.7% bar. Use your real marginal rate, including fees, not the headline coupon.
• It replaces bad debt, not just delay. The programme above breaks even if it also prevents $28,945 a year of bad debt and collection cost on that revenue — about 1.21% of the $2,400,000 involved. On a shaky customer segment that is plausible; on a blue-chip one it is not.
• It is targeted, not published. Offering discounts to customers who already pay on day 12 is pure cannibalisation. If half the takers would have paid by day 15 anyway, the AR released falls to $122,959, the annual benefit to $11,066, and the loss widens to $36,934.
• It buys something structural. A discount traded for a switch to direct debit, consolidated invoicing or removal of a purchase-order matching step can be worth more than the 2%, because it changes the process permanently rather than one payment date.

Both sides in one table

Unearned discounts, and other leaks

If you offer terms like these, budget for the leakage. Customers deduct the 2% and pay on day 28. Some deduct it from a partial payment. Some deduct it on an invoice that was never on discount terms. Each deduction is small; the aggregate is not, and it lands in your AR as thousands of tiny unresolved balances that clog every aging bucket and cost more to clear than they are worth.

Two controls are enough. First, validate the discount against the receipt date automatically and rebill unearned deductions the same week, before the customer treats the practice as agreed. Second, put a de minimis threshold in writing — below it, write the deduction off rather than spend a collector's hour on it. A policy nobody enforces is a discount you extended to everybody.

Getting the numbers to make this decision

Both sides of this decision need data most ERPs will not hand you in one query: spend by supplier with the discount terms attached and the actual payment date, or sales by customer with the discount taken and the actual receipt date. Without that, you cannot tell how many discounts you are already missing, or how many you are giving to customers who paid early anyway. The DPO calculator and the cash conversion cycle view show what the days are worth once you have them.

Ask ERPray "which suppliers offer early payment discounts, how much did we forfeit last quarter by paying after the discount date, and what would it have cost to fund taking them all?" The answer is computed live from your own account, with the query shown so you can check which terms it matched on. Read-only by default — it will not touch a payment run.