Early payment discount
A price reduction a supplier offers if an invoice is paid before its due date, such as 2% off if paid within 10 days.
In short
- Terms like 2/10 net 30 mean 2% off if paid within 10 days, otherwise the full amount in 30.
- Skipping a 2/10 net 30 discount costs about 37% a year, far more than most borrowing.
- Taking discounts needs fast approval. Slow invoices miss the window.
Annualized cost of skipping = Discount ÷ (1 − Discount) × 365 ÷ (Net days − Discount days)
For 2/10 net 30: 0.02 ÷ 0.98 × 365 ÷ 20 ≈ 37.2% a year.
An early payment discount, or prompt payment discount, rewards a buyer for paying sooner than required. It is written into the payment terms. The most familiar form is "2/10 net 30": the buyer can take 2% off if it pays within 10 days, or pay the full invoice within 30.
Why it is worth more than it looks
Two percent sounds small. But the buyer only gains 20 days of extra time by not taking it, from day 10 to day 30. Paying 2% to keep money for 20 days works out to an annual cost of roughly 37%. Unless the business has no cash at all, or can earn more than that elsewhere, taking the discount is almost always the better deal.
Making it happen
Discounts are often lost to process rather than to choice. An invoice that sits in an inbox, waits for approval or arrives by mail to the wrong office can easily be past day 10 before anyone sees it. Capturing invoices on arrival, flagging those with discount terms and approving them first are what turn discount terms into savings.
Dynamic discounting
Some buyers offer suppliers a sliding scale: the earlier the payment, the bigger the discount, negotiated invoice by invoice. It lets buyers with spare cash earn a return from their own payables.
Worked example
A $50,000 invoice on 2/10 net 30
Paying on day 10 costs $49,000. Paying on day 30 costs $50,000. The business pays $1,000 to keep $49,000 for 20 extra days. If its line of credit charges 8% a year, borrowing $49,000 for 20 days costs about $215. Taking the discount saves roughly $785.