Early Payment Discounts: Why '2/10 Net 30' Equals a 37% Annual Return
October 21, 2026
Suppliers often offer a discount for paying invoices early. The term '2/10 net 30' means you may deduct 2% if you pay within 10 days; otherwise the full amount is due in 30 days. The discount looks small, but it is paid for just 20 days of financing, so the implied annual rate is high. The formula is: implied rate = discount ÷ (1 − discount) × 365 ÷ (days paid late − discount period). For 2/10 net 30: 0.02 ÷ 0.98 × 365 ÷ 20 = 37.2% simple, or 44.6% if compounded.
In other words, passing up the discount is like borrowing at 37% annualized from your supplier.
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An invoice of $10,000 has terms 2/10 net 30. Pay on day 10 and you pay $9,800, saving $200. Pay on day 30 and you pay $10,000. By waiting 20 more days, you effectively pay $200 to keep $9,800 for 20 days. The 20-day cost as a percentage is 200 ÷ 9,800 = 2.04%. There are 365 ÷ 20 = 18.25 such periods in a year, so the simple annualized rate is 2.04% × 18.25 = 37.2%. Compounded: (1.0204)^18.25 − 1 = 44.6%.
If you could borrow from a bank at 10%, paying early and financing the payment with a line of credit would be far cheaper than forgoing the discount.
| Terms | Discount | Days financed | Implied annual rate (simple) |
|---|---|---|---|
| 1/10 net 30 | 1% | 20 | 18.4% |
| 2/10 net 30 | 2% | 20 | 37.2% |
| 2/10 net 60 | 2% | 50 | 14.9% |
| 3/10 net 30 | 3% | 20 | 56.4% |
| 1/15 net 45 | 1% | 30 | 12.3% |
When to Take the Discount
Compare the implied rate with your cost of capital. If you have cash or access to credit at less than the implied rate, take the discount. A business that is short of cash and can borrow only at very high rates, or one that earns a high return on its own cash (for example by investing in inventory with a quick turn), may prefer to delay payment.
Do not stretch payments beyond the net period to chase extra financing; late penalties and damaged supplier relationships can cost more than the interest you save.
The Seller's View
For the seller, offering 2/10 net 30 means paying 37% for faster cash, which makes sense only if the seller's alternative cost of funds is very high or collection risk is significant. Many sellers offer smaller discounts, such as 1/10 net 30, or use them selectively with customers who pay slowly. The discount also reduces credit risk and administrative costs.
Dynamic Discounting and Practical Tips
Some platforms allow sliding-scale discounts, where the earlier you pay, the bigger the discount. Track terms in your accounts payable system and schedule payments to arrive on the last discount day, not earlier. Consider whether discounts are calculated on the invoice total, including tax and freight. Check that your bank's payment processing times do not make you miss the window.
Related Concepts
The same calculation applies to any 'pay now or later' decision, such as a store offering a discount for paying cash versus store credit, or a contractor offering 5% off for payment in advance. Convert the discount into an annual rate and compare with alternatives.
Frequently Asked Questions
What does 2/10 net 30 mean?
A 2% discount if paid within 10 days, otherwise the full amount is due in 30 days.
How do I calculate the annual rate of an early payment discount?
Discount ÷ (1 − discount) × 365 ÷ (days between discount deadline and due date).
Is it worth taking a 2% discount?
Usually yes if you can pay without borrowing at rates above the implied annual rate (about 37% for 2/10 net 30).
What if I miss the discount period?
You owe the full amount by the due date.
Can I pay later than the net date?
Paying late may incur penalties and harm the supplier relationship.