What is an early payment discount?
By Tim White · Glossary · Last updated
An early payment discount is a price cut a supplier offers for paying before the due date. It's written as terms like 2/10 net 30: 2 percent off if you pay within 10 days, otherwise the full amount is due in 30. When you have the cash, it's usually worth taking.
How to read the terms
The first number is the discount percentage, the second is the number of days you have to claim it, and 'net 30' is the final due date. 1/15 net 45 means 1 percent off within 15 days, full amount in 45. The days count from the invoice date.
A worked example
Acme Paper bills 5,000.00 on 2/10 net 30. Pay by day 10 and you send 4,900.00. You're paying 20 days early to save 100.00.
To compare that with other uses of the cash, annualize it: 2 divided by 98, times 365 divided by 20, is about 37 percent. Few small businesses earn that on idle cash, which is why these discounts are usually worth taking when the money is there.
The catch is timing
Ten days goes fast when an invoice sits in an inbox for a week before anyone records it. Record bills the day they arrive and flag the ones with discount terms. InvoiceJet records the invoice date from each bill, so day 10 is easy to work out while there's still time to pay.
Common questions
Is 2/10 net 30 worth taking?
Usually, if the cash is available. The annualized return is about 37 percent.
Can I take the discount if I pay on day 12?
Not by the terms. Some vendors allow it anyway, but ask first. Deducting a discount you didn't earn is a common cause of short-payment disputes.
Sources
Keep reading
Try it on your own invoices
10 invoices a month free, no card. Every field comes back with a confidence level and the text it was read from.