Early Payment Discount Calculator

Enter the invoice amount and the terms you are considering. The discount itself is simple arithmetic; the number worth seeing is the annualised cost of buying your cash 20 days early.

What this tool does

An early payment discount trades margin for cash-flow. Offered as a supplier, it is a form of borrowing: you are paying a fee to receive your own money sooner. Taken as a customer, it is an investment — a guaranteed return for paying early.

Both sides are usually assessed on the headline percentage, which is why the terms persist. Two percent sounds trivial. Annualised, 2/10 net 30 costs about 37% — well above almost any credit facility a business has access to. This calculator shows the cash and the annualised cost together, so the decision is made on the number that matters.

How it works

  1. Enter the invoice and the terms

    Terms are conventionally written discount/days net days — "2/10 net 30" is 2% off if paid within 10 days, otherwise the full amount at 30.

  2. The discount is the easy part

    Discount = invoice x rate. On £10,000 at 2%, that is £200 given up, leaving £9,800 collected.

  3. The cost is the part that matters

    Annualised cost = discount / (100 - discount) x 365 / (net days - discount days). The denominator is 100 minus the discount, not 100, because you are financing the discounted amount — that is the sum actually received.

  4. Compare it against your alternatives

    If the annualised cost exceeds what an overdraft or invoice finance facility would charge, the discount is the more expensive way to accelerate cash — and shortening your standard terms is usually cheaper than discounting them.

Worked example

A supplier offers 2/10 net 30 on a £10,000 invoice.

Inputs

Invoice amount
£10,000.00
Discount
2%
Discount period
10 days
Full term
30 days

Result

Discount given up
£200.00
Amount collected
£9,800.00
Days accelerated
20
Annualised cost
37.24%

Why it matters: Two percent to get paid 20 days sooner annualises to just over 37%. As a customer with cash available, taking it is a 37% risk-free return. As a supplier, it is an expensive way to borrow — and worth comparing against simply invoicing on Net 14.

Best practices

  • Compute the annualised cost before offering terms, not after. The headline percentage is not the decision-relevant number.
  • Consider shortening your standard terms instead. Net 14 with no discount often collects faster than Net 30 with a 2% discount, and costs nothing.
  • As a customer, take discounts that beat your cost of capital and decline the rest — but only if you can genuinely pay within the window.
  • Watch for customers who take the discount and pay late anyway. That is the worst outcome for a supplier, and it is common enough to be worth a policy.
  • State the discount deadline as a date on the invoice, not as a number of days. It removes the argument about when the clock started.

Common mistakes

Dividing by the full invoice instead of the discounted amount

The correct denominator is 100 minus the discount. Using the gross amount understates the cost — in the flattering direction, which is why the mistake survives.

Treating the discount as a marketing cost

It is financing. A 2% discount on every invoice is not a promotion, it is a 37% annualised credit line drawn on continuously.

Offering discounts to customers who already pay on time

They will take the discount and keep paying as they always did. The cash arrives no sooner and the margin is gone. Target discounts at slow payers, or not at all.

Allowing the discount to be taken after the window closes

A discount claimed on day 25 of a 10-day window is a 2% price cut with no cash-flow benefit whatsoever. If you accept it once, it becomes the price.

Frequently asked questions

What does 2/10 net 30 mean?

A 2% discount if the invoice is paid within 10 days; otherwise the full amount is due at 30 days. The first number is the discount, the second is the window to earn it, and the last is the standard term.

Why is a 2% discount equivalent to about 37% a year?

You give up 2% to be paid 20 days sooner. There are roughly 18 such 20-day periods in a year, and the 2% is charged on the 98% you actually receive. 2/98 x 365/20 works out at about 37.2%.

Should I offer an early payment discount?

Only if the annualised cost is cheaper than your alternatives and you genuinely need the cash sooner. For many businesses, shortening standard terms or invoicing promptly achieves more at no cost. If you regularly draw on expensive short-term credit, a discount may be the cheaper option.

Should I take a supplier’s early payment discount?

If you have the cash and no better use for it, usually yes — a 37% annualised return with no risk is difficult to beat. If taking it means drawing on credit that costs more than the discount saves, it is not worth it.

How is VAT or sales tax handled on an early payment discount?

Treatment differs by jurisdiction. Some require tax to be accounted for on the amount actually received, others on the full invoice value with an adjustment if the discount is taken. This affects the invoice wording as well as the return, so check the rules that apply to you.

What is a typical early payment discount?

1% to 2% within 10 days against 30-day terms is the most common structure in trade. Anything above 3% is unusual and annualises to a rate most businesses would be better off replacing with a credit facility.

Turn the answer into an invoice

The result above transfers straight into the invoice generator — dates, amounts and terms already filled in. Free, no account needed.

Open the invoice generator

Sources & further reading

Related

Invoice types

Published · General information, not legal, tax or financial advice.