About the Early Payment Discount Calculator
This early payment discount calculator evaluates trade credit terms such as 2/10 net 30, where a supplier gives 2% off if you pay within 10 days and otherwise expects the full amount in 30 days. It converts the discount into an annualised interest rate, so you can see what it really costs to hold on to the cash for the extra days.
Buyers and accounts payable teams use it to decide which invoices are worth paying early; sellers use it to price a discount that speeds up collections without giving away too much margin. Enter the discount, the discount window, the net due date, the invoice amount and your own borrowing rate or return on cash.
If the annual cost of skipping the discount is higher than what your money earns or costs elsewhere, taking the discount is the better deal — even if you have to draw on a line of credit to do it. The calculator assumes you pay on the last day of the discount window or on the net due date, and uses a 365-day year.
With the default inputs, the annual cost of skipping the discount is 37.24%. Change any value above to recalculate instantly.
How to use the early payment discount calculator
- 1Read the terms on the invoice — in 2/10 net 30 the discount is 2%, the discount period 10 days and net 30 days.
- 2Enter the invoice amount to see the dollar saving.
- 3Enter your credit line rate or what your cash earns.
- 4Compare the annual cost of skipping the discount with your rate and follow the recommendation.
Formula and method
If you skip the discount you keep the discounted amount (1 − d of the invoice) for N − D extra days and pay the discount d as the price of that credit. The periodic interest rate is therefore d ÷ (1 − d). Multiplying by the number of such periods in a 365-day year gives the nominal annual cost, the figure used in most finance textbooks.
The effective annual cost compounds the periodic rate instead of multiplying it, which assumes you could repeat the same trade-off all year. Compare either figure with your borrowing rate: if the cost of skipping is higher, take the discount.
- d
- Discount as a decimal (2% = 0.02)
- D
- Discount period in days
- N
- Net payment period in days
Worked examples
2/10 net 30 on a $10,000 invoice
The periodic rate is 0.02 ÷ 0.98 = 2.04% for 20 extra days. With 18.25 such periods a year, the nominal cost is 37.24% and the compounded cost 44.59%. Both are far above an 8% credit line, so paying $9,800 early and saving $200 is the better choice.
1/10 net 60 with an 8% credit line
A 1% discount for paying 50 days early annualises to only 1 ÷ 99 × 365 ÷ 50 = 7.37%. That is below the 8% borrowing rate, so waiting until day 60 is cheaper than borrowing to pay early.
3/15 net 45
Three percent for 30 days of credit is 0.03 ÷ 0.97 × 365 ÷ 30 = 37.63% a year. Paying $4,850 within 15 days saves $150 and beats a 10% cost of funds.
Frequently asked questions
What does 2/10 net 30 mean?+
It means the buyer can take a 2% discount if the invoice is paid within 10 days; otherwise the full amount is due within 30 days. Other common terms are 1/10 net 30 and 2/10 net 60.
What is the annual cost of not taking a 2/10 net 30 discount?+
About 37.2% per year using the simple formula 2/98 × 365/20, or about 44.6% compounded. Few businesses borrow that expensively, so the discount is usually worth taking.
Should I borrow to take an early payment discount?+
If your credit line rate is below the annual cost of skipping the discount, yes — borrowing to pay early is cheaper than paying the full invoice later. The calculator compares the two for you.
Is offering an early payment discount a good idea for sellers?+
It speeds up cash collection and lowers DSO, but it is an expensive way to raise cash. A 2/10 net 30 discount costs the seller the same ~37% annual rate, so compare it with factoring or a line of credit.
Why is the effective rate higher than the nominal rate?+
The nominal rate multiplies the periodic cost by the number of periods; the effective rate compounds it, as if you rolled the same trade-off over all year. Compounding always gives a higher figure for positive rates.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.