An early payment discount gives the customer a percentage off in exchange for paying sooner. The standard notation packs three numbers together: "2/10 Net 30" means deduct 2% if paid within 10 days, otherwise the full amount is due at 30 days.
It is a financing arrangement wearing the costume of a courtesy. You are paying a fee to be paid earlier, and the fee is the discount you gave up.
Why It Matters
The annualised cost is far higher than the headline suggests, and most people never calculate it. With 2/10 Net 30 you surrender 2% to be paid 20 days sooner. On the 98% you actually collect that is 2.04% for 20 days, and there are about 18.25 such periods in a year — an annualised cost near **37%**. That is worth paying only if your alternative finance is more expensive, or if the discount is really buying collection certainty rather than speed. The same arithmetic run in reverse means accepting a supplier’s 2/10 Net 30 is usually an excellent return on spare cash.
Example
A £10,000 invoice on 2/10 Net 30 pays £9,800 if settled by day 10. The £200 given up bought 20 days of earlier access to £9,800 — an annualised rate of roughly 37%, which is more than most business borrowing costs.
Frequently Asked Questions
How do I calculate the annualised cost?
Divide the discount by the amount you actually receive, then multiply by 365 divided by the days saved. For 2/10 Net 30: (2 ÷ 98) × (365 ÷ 20), which is about 37%.
Should I offer one?
Only where the cash is genuinely worth more to you than the cost, or where it reliably converts slow payers into prompt ones. As a default gesture of goodwill it is one of the most expensive things on an invoice.