Early payment discounts

What 2/10 Net 30 means

Two per cent off if the invoice is paid within ten days; otherwise the whole amount within thirty. The first number is the discount, the second is how long it lasts, and the Net figure is the ordinary term. On 10,000 that is 200 off and 9,800 paid, or 10,000 paid twenty days later.

Why it costs far more than two per cent

The 2 per cent does not buy a year. It buys the twenty days between day ten and day thirty, and it is paid out of the 98 you actually receive rather than the 100 you invoiced. Annualised:

That is the number to hold the terms against. If the cash is covering something that costs you less than 37 per cent a year, the discount is the expensive way to get it. If it is covering an overdraft, a card balance or an invoice you are about to be late on yourself, it may well be the cheap one.

The discount window has to be shorter than the term

"2/30 Net 30" gives away two per cent and buys nothing: the money was due that day anyway. The gap between the two dates is the only thing the discount is paying for, so when the window matches the term there is no annual rate to work out, and the calculator says so rather than printing a figure.

An offer, not a price cut

The invoice goes out at its full amount. The discount applies only if the payment arrives inside the window, which is why Create this invoice on the calculator opens the document at full value with the Net date as its due date — put the offer in the notes, where it belongs, rather than in the total. An invoice issued at the discounted figure hands the discount over whenever they pay, including late.

Early payment discount, late fee, invoice discount

Three different things that all move the number. An early payment discount is a conditional reduction for paying sooner. A late fee is a charge added for paying after the due date — late payment fees covers it, and the late payment fee calculator does the sum. An ordinary invoice discount comes straight off the total for everyone, whenever they pay, and belongs in the invoice calculator instead.