Last reviewed 13 August 2026
Turn any discount terms into the number that decides it: the effective annual rate. Then see whether that rate is worth paying as the supplier, or worth taking as the buyer.
An early payment discount costs far more per year than it looks per invoice. Divide the discount by what the payer actually hands over, then annualize it over the days the cash moves forward.
Example: 2/10 net 30. The buyer pays 2 percent to settle 20 days early, which works out at 37.24 percent a year.
The same arithmetic answers two opposite questions, so start with which side of the invoice you are on.
Enter a discount between 0.01 and 99 percent.
Enter an invoice amount above zero.
Net days must be greater than the discount days.
Enter a cost of capital between 0 and 100 percent.
Four sets of terms, ranked by effective annual rate. Edit any of them.
Enter an invoice amount above zero.
| Discount % | Discount days | Net days | Remove |
|---|---|---|---|
Each row needs net days greater than its discount days, and a discount under 100 percent.
| Terms | Days bought | Discount given | Payable if settled early | Effective annual rate | Rank | Against your cost of capital |
|---|
A whole year of these terms, not one invoice. Use it to decide whether a discount program is worth running.
Enter an annual value above zero.
Enter a take up rate between 1 and 100 percent.
Enter a discount between 0.01 and 99 percent.
Enter at least one day.
Enter a cost of capital above zero.
Enter a rate between 0 and 100 percent.
The arithmetic the tool is running:
Effective annual rate = (Discount % / (100 - Discount %)) x (365 / (Net days - Discount days))
Key takeaways
The discount on this invoice
$200
Effective annual rate 37.2%
37.2% a year to be paid 20 days sooner.
Paidnice adds and expires prompt payment discounts for you in Xero and QuickBooks.
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An early payment discount is a short term loan wearing a percentage sign. The percentage is always smaller than the interest rate hiding inside it.
Written down, 2/10 net 30 looks like a 2 percent price adjustment. It is really a decision about 20 days of cash. The supplier is buying those 20 days, and the buyer is being paid to hand the money over early.
Twenty days is roughly one eighteenth of a year, so that 2 percent repeats about eighteen times before the year is out. The annual rate lands at 37.24 percent.
Which way that cuts depends on which side of the invoice you sit. For the supplier, 37 percent a year is the price of accelerating your own cash, and it is almost certainly dearer than your bank.
For the buyer, it is a guaranteed return on 20 days of working capital with no credit risk attached, and very little else pays that. The same arithmetic produces opposite advice, which is why these conversations talk past each other.
The quick version. Discount divided by what you actually pay, times 365 divided by the days the cash moves. On 2/10 net 30 that is 2 divided by 98, times 365 divided by 20, which is 37.24 percent a year.
Each input in Effective annual rate = (Discount / (100 - Discount)) x (365 / (Net days - Discount days)) is a place where the answer quietly comes out wrong.
A 2 percent discount on a $10,000 invoice means paying $9,800 to avoid paying $10,000. The $200 buys the use of $9,800, so the cost ratio is 200 / 9,800, or 2.04 percent. The gap is small at 2 percent and large at 10 percent, where 10 / 90 is 11.1 percent.
2/10 net 30 moves the cash by 20 days, not 30. The period is always net days minus discount days, because the choice is between paying on day 10 and paying on day 30. Using 30 understates the annual rate by a third, and it is the most common error here.
Dividing 365 by the days bought gives how often the trade repeats in a year, 18.25 for a 20 day window. That makes the result comparable with a loan or a card rate. Some treasury teams use a 360 day year, which gives 36.73 percent for 2/10 net 30.
The supplier compares against the cheapest funding they can draw today. The buyer compares against their own cost of capital. Comparing against a rate you cannot access makes the decision look easier than it is.
A $10,000 invoice on 2/10 net 30. The buyer can pay $9,800 on day 10 or $10,000 on day 30.
Now read it from each side. The buyer with an 8 percent cost of capital gives up 9,800 x 8% x 20 / 365 = $42.96 by paying early, and gains $200. Taking the discount is worth $157 on this one invoice.
The supplier funding the same 20 days on a 9 percent credit line would pay 9,800 x 9% x 20 / 365 = $48.33. They handed over $200 to buy something worth $48.33, so offering the discount cost them $151.67 more than borrowing would have.
The bands below say how expensive the money is, not whether the answer is good. A high rate is what a buyer wants and what a supplier should avoid paying, so read the band first and apply your own direction to it.
Cheap money
Under 15% a year
Priced near a bank line. Reasonable to offer, marginal to take.
Around borrowing cost
15 to 25% a year
Roughly what unsecured credit costs. The decision is genuinely close.
Above most credit lines
25 to 40% a year
Where standard terms sit. Take it as a buyer, price it as a supplier.
Above almost any funding
Over 40% a year
Only defensible when the alternative is not getting paid at all.
One offset for the supplier. A discount taken is an invoice that will not need chasing, will not age into a dispute and will not become bad debt. If your write off rate is 1 percent of revenue, that is worth counting. It does not close a 29 point gap, but it belongs in the comparison.
Standard terms run from about 12 percent a year on 1/15 net 45 to about 56 percent on 3/10 net 30. Quote the effective annual rate column internally, and the compounded column only if you repeat the trade all year.
| Terms | Days the cash moves | Given up on a $10,000 invoice | Effective annual rate | Compounded equivalent |
|---|---|---|---|---|
| 1/10 net 30 | 20 days | $100 | 18.43% | 20.13% |
| 2/10 net 30 | 20 days | $200 | 37.24% | 44.59% |
| 3/10 net 30 | 20 days | $300 | 56.44% | 74.35% |
| 2/10 net 60 | 50 days | $200 | 14.90% | 15.89% |
| 1/15 net 45 | 30 days | $100 | 12.29% | 13.01% |
| 2/15 net 45 | 30 days | $200 | 24.83% | 27.86% |
Every figure in this table is calculated from the terms shown using the formula on this page, not surveyed. Reviewed August 2026.
Discounts are standard in wholesale, manufacturing and print, occasional in food supply and services, and rare in construction. What is normal in your market shapes take up as much as the rate does.
| Sector | How common | Terms you will see | Effective annual rate | Why |
|---|---|---|---|---|
| Wholesale and distribution | Common | 2/10 net 30 | 37.2% | Trade credit is part of the offer, so the discount is part of the price list |
| Manufacturing | Common | 1/10 net 30 | 18.4% | Large invoice values make even 1 percent a real cash number |
| Print, packaging and materials | Common | 2/10 net 30 | 37.2% | Long standing convention, often inherited rather than priced |
| Food and beverage supply | Occasional | 1/10 net 21 | 33.5% | Thin margins cap the discount, short terms raise the annual rate |
| Professional services | Occasional | 2/10 net 30 | 37.2% | Used selectively on slow payers rather than published |
| Construction and trades | Rare | 1/10 net 45 | 10.5% | Retentions and progress claims make a fixed early date hard to hold |
Prevalence and typical terms compiled from published trade terms and Paidnice customer configurations, reviewed August 2026. Treat the first three columns as orientation, not as sourced data. The rate column is calculated from the terms shown.
Four conventions are in circulation, and they give four different numbers for the same terms. Quote the simple annualized rate unless a treasury policy says otherwise.
| Method | What it gives you | 2/10 net 30 | Use it when |
|---|---|---|---|
| Simple annualized | Per period cost multiplied by periods per year | 37.24% | Default. This is the figure everyone quotes |
| Compounded | Per period cost raised to the power of periods per year | 44.59% | You genuinely reinvest the saving every cycle |
| 360 day year | The same, on a banker's year | 36.73% | Your treasury policy already uses 360 days |
| Dynamic, pro rata | A sliding discount that prices every day at one rate | Set by you | You want early payment without a cliff edge deadline |
Dynamic discounting scales the discount with how early the payment lands, so the supplier picks the annual rate instead of inheriting it from convention.
Fixed terms have a cliff. Pay on day 10 and you save 2 percent, pay on day 11 and you save nothing, which makes the discount worthless to a customer whose approval cycle runs to twelve days.
Work backwards from the rate you are willing to pay: Discount percent = Target annual rate x Days early / 365. At a 12 percent target, payment 20 days early earns 0.66 percent and 40 days early earns 1.32 percent.
Every point on that scale costs the supplier the same 12 percent a year. Set the target near your real funding rate and the program becomes a funding decision rather than a margin leak.
Unearned discounts are the quiet cost. A customer who deducts 2 percent and then pays on day 26 has taken the discount without delivering the early payment. Left unchallenged it becomes a standing 2 percent price cut. Whoever approves the receipt has to check the date, every time, or the terms are decorative.
The fewer days a discount buys, the higher its annual rate. Check which of these is inflating the number before you accept the terms as normal.
The right comparison is not the discount against nothing. It is the discount against collecting on time, which costs no margin at all.
Most of the days a discount buys are days you lost to your own process, not to your customer's.
Nearly all of that is repetition, which is why it automates. Paidnice applies prompt payment discounts to invoices before they go out and removes them when they expire, so an unearned discount cannot become a permanent price cut.
Automated email and SMS reminders fire before and after the due date, AR reporting shows whether the discount is shifting payment dates, and late fees hold the other end of the terms.
Run the alternative before you commit. If the cash is the point, compare the discount against the other ways to fund the same gap. The invoice factoring calculator converts a factoring quote into the same annual rate, so the two sit on one scale, and the net 30 calculator shows what changing the terms themselves would do.
Paidnice adds a prompt payment discount to the invoice before it sends, then removes it automatically once the discount window closes.
See prompt payment discountsPut the discount percent in A1, discount days in B1, net days in C1, the invoice amount in D1 and your cost of capital in E1.
=(A1/(100-A1))*(365/(C1-B1)), formatted as a percentage=D1*A1/100=D1*(1-A1/100)=(1+A1/(100-A1))^(365/(C1-B1))-1=D1*(1-A1/100)*(E1/100)*((C1-B1)/365)=(D1*A1/100)-(D1*(1-A1/100)*(E1/100)*((C1-B1)/365))=F1*G1/365Watch the two denominators. Dividing by 100 instead of by 100 minus the discount, or by net days instead of the days actually bought, are the two errors that show up in almost every spreadsheet version of this calculation. Together they can understate the annual rate by more than a third.
Expressed as annual rates, every way of pulling cash forward lines up on one scale. What differs between businesses is which of them you can reach.
| Option | Typical annual cost | Who carries the risk | Reversible |
|---|---|---|---|
| Collecting on your stated terms | Nothing | You | Not applicable |
| Shortening the terms themselves | Nothing, but it is a negotiation | You | Hard |
| Bank line of credit | 7 to 15% | You | Yes |
| Early payment discount | 12 to 75% depending on terms | Nobody, no debt is created | Yes, at the next invoice |
| Invoice factoring | 15 to 70% | Your customer, or you on recourse | Contract term |
| A payment plan on the other side | Your own cost of capital | You | Yes |
The discount is the only line in that table that creates no debt and no third party, which is why it survives despite being expensive. It is also the only one your customer can decline.
On the buying side, the mirror of this decision is your days payable outstanding. Taking every discount shortens it, and a shorter DPO is only worth having when the rate you captured beats the cash you gave up.
Four places this goes wrong. The first three change the rate, the last changes the decision.
Divide the discount by what the payer actually hands over, then annualize it over the days the cash moves. The formula is Effective annual rate = (Discount / (100 - Discount)) x (365 / (Net days - Discount days)). For 2/10 net 30 that is (2 / 98) x (365 / 20), which is 37.24 percent a year. The cash discount itself is simply the invoice total multiplied by the discount percentage.
37.24 percent. The buyer pays 9,800 dollars instead of 10,000 dollars, so the 200 dollars buys the use of 9,800 dollars for the 20 days between the discount deadline and the due date. That is 2.04 percent for 20 days, and there are 18.25 such periods in a year. Compounded rather than annualized simply, the same terms work out at 44.59 percent.
Take 2 percent off if you pay within 10 days of the invoice date, otherwise the full amount is due on day 30. On a 10,000 dollar invoice that is 9,800 dollars by day 10 or 10,000 dollars from day 11 to day 30. The first number is the discount, the second is the discount window, and the last is the credit period.
Take it whenever the effective annual rate beats what the money would otherwise earn or cost you. Almost every standard cash discount clears that test: 2/10 net 30 pays 37 percent a year, and very little else does. Skip it when cash is genuinely tight, when your credit line is maxed, or when the terms are long enough that the annual rate falls below your own borrowing rate.
The same rate the buyer earns. Offering 2/10 net 30 costs you 2.04 percent of the cash you collect to be paid 20 days sooner, which is 37.24 percent a year. On 1,000,000 dollars of invoices taken up at those terms, you give up 20,000 dollars annually to pull roughly 53,700 dollars of cash forward permanently. Compare that against your own funding rate before you publish the terms.
An early payment discount is a price cut you offer your own customer in exchange for faster payment, so no lender is involved and nothing appears on your balance sheet as debt. Invoice discounting is borrowing against the invoice from a finance provider, repaid when the customer pays. One costs you margin, the other costs you interest and fees.
The net amount is the invoice total minus the discount: Net payable = Invoice total x (1 - Discount / 100). A 3 percent discount on a 4,500 dollar invoice gives 4,500 x 0.97, which is 4,365 dollars, a saving of 135 dollars. If your invoice carries sales tax or VAT, apply the discount to the pre tax value first, then recalculate the tax on the reduced figure.
Dynamic discounting replaces the cliff edge deadline with a sliding scale, so the discount shrinks each day payment is delayed. Pick the annual rate you are willing to pay, then Discount percent = Target annual rate x Days early / 365. At a 12 percent target, payment 20 days early earns 0.66 percent and payment 40 days early earns 1.32 percent. Every point on the scale prices at the same annual rate.
The arithmetic is identical, but the VAT treatment is not. Since April 2015 UK suppliers account for VAT on the amount actually received, so if the customer takes the discount the VAT falls with it. In practice you either issue a credit note or state both figures on the invoice. Check the current HMRC guidance before you change your invoice wording.
Two conventions exist. The simple annualized rate multiplies the per period cost by the number of periods in a year, which is the standard quoted figure and gives 37.24 percent for 2/10 net 30. The compounded rate assumes you reinvest each period, raising the per period cost to the power of the number of periods, and gives 44.59 percent. Quote the simple rate unless a treasury policy says otherwise.
Take them in rate order until the cash runs out. Rank every supplier by effective annual rate, take the highest first, and stop when your available cash or your credit line does. A discount on short terms such as 2/10 net 20 pays about 74 percent a year, while 2/10 net 60 pays under 15 percent, so the ranking matters more than the headline percentage.
Paidnice is accounts receivable automation that enforces your payment terms, trusted by thousands of businesses on Xero and QuickBooks. Credit control and debtor management, run for you.
INV-434
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