# Settlement Discount

> A settlement discount cuts the invoice amount for paying early, such as 2/10 net 30, at a high annualised rate.

Source: https://www.paidnice.com/dictionary/settlement-discount
Publisher: Paidnice
Part of: Accounts Receivable Dictionary, https://www.paidnice.com/dictionary

---

## What is a settlement discount?

**A settlement discount is a reduction in the amount owed on an invoice, offered by a seller to encourage the buyer to pay early.** It is usually written as a percentage paid within a set number of days, such as 2/10 net 30, which means take 2% off if you pay within 10 days, otherwise the full amount is due in 30. It is also called an early payment discount or cash discount.

Sellers use settlement discounts to pull cash in sooner and reduce the risk of late or unpaid invoices. Buyers gain a genuine saving for paying early. The catch worth understanding is that a small percentage over a short window is a very high annualised return, so these discounts are usually worth taking if you have the cash.

### Key takeaways

- **Pay early, pay less.** A percentage off the invoice for paying within a short window, for example 2/10 net 30.
- **It speeds up cash.** Sellers shorten days sales outstanding and reduce the risk of late payment.
- **The implied rate is high.** 2/10 net 30 is roughly a 37% annualised return, so it is usually worth taking.

## How to calculate a settlement discount

Multiply the invoice amount by the discount percentage to get the saving, then subtract it to get the amount payable if you pay early.

```
Saving         = invoice amount x discount %
Amount payable = invoice amount - saving
```

The most useful figure, though, is the annualised cost of not taking the discount, which tells you whether early payment is a good use of cash.

```
Annualised cost = (discount % / (100 - discount %)) x (365 / (net days - discount days))

2/10 net 30: (2 / 98) x (365 / 20) = about 37% a year
```

An interactive calculator for this is on the page.

That annualised figure is the point: turning down a 2/10 net 30 discount is like borrowing at about 37% a year, far more than most financing. The [early payment discount calculator](https://www.paidnice.com/calculators/early-payment-discount-calculator) lets you compare offers side by side, and [prompt payment discounts in Paidnice](https://www.paidnice.com/prompt-payment-discounts) apply these terms automatically in Xero and QuickBooks. See also [2/10 net 30](https://www.paidnice.com/dictionary/2-10-net-30) for the most common terms.

## Settlement discount received vs allowed

"Settlement discount allowed" is the seller's side (an expense or reduction in revenue for the discount given); "settlement discount received" is the buyer's side (a reduction in the cost of the purchase). The same discount appears in both sets of books, just from opposite directions.

- **Settlement discount allowed (seller).** An expense or reduction in revenue for the discount given. Recorded when a customer pays early and takes the offer.
- **Settlement discount received (buyer).** A reduction in the cost of the purchase. Recorded when the buyer pays early to claim the saving.

Under modern revenue rules, sellers usually estimate expected discounts and net them off revenue rather than booking them only when taken.

## Settlement discount vs cash, trade and early-payment discounts

These terms overlap and are often used interchangeably, but they are not identical. This table shows how a settlement discount compares with the others you will see on invoices.

| Discount type | What it is | Based on |
| --- | --- | --- |
| Settlement discount | A reduction for paying an invoice early, for example 2/10 net 30. | Speed of payment |
| Cash / early-payment discount | The same idea under different names, common in US usage. | Speed of payment |
| Trade discount | A reduction off list price for a class of customer, applied before the invoice is raised. | Customer or channel |
| Volume / bulk discount | A reduction for ordering a larger quantity. | Order size |

## Frequently asked questions

**How do you calculate a settlement discount?**
Multiply the invoice amount by the discount percentage to get the saving, then subtract it from the invoice to get the amount payable if you pay early. For example, a 2% discount on a 1,000 invoice is a 20 saving, so you pay 980 if you settle within the discount period.

**What does settlement discount received mean?**
Settlement discount received is the buyer's side of the discount: the reduction in the cost of a purchase gained by paying the supplier early. The seller records the same amount as a settlement discount allowed.

**Is a settlement discount the same as a cash discount?**
In everyday use, yes. Settlement discount, cash discount and early-payment discount all describe a reduction for paying an invoice early. The term settlement discount is more common in UK and Commonwealth usage, while cash or early-payment discount is more common in the US.

**Is it worth taking a settlement discount?**
Usually yes, if you have the cash. A 2/10 net 30 discount works out to roughly a 37% annualised return, which is far higher than most short-term financing costs, so paying early to take the discount is normally the better use of funds.

## Related

- [Early payment discount calculator](https://www.paidnice.com/calculators/early-payment-discount-calculator): compare discount offers and their true cost.
- [2/10 net 30](https://www.paidnice.com/dictionary/2-10-net-30): the most common settlement discount terms.
- [Prompt payment discounts](https://www.paidnice.com/prompt-payment-discounts): apply early-payment terms automatically.

General information, not financial advice.