How to use the early payment discount calculator
- Enter the invoice amount and the discount for paying early, as a percent.
- Enter how many days you have to take the discount and the number of days until the full amount is due.
- Optionally enter a yearly rate that you pay to borrow or that you earn on spare cash, to compare with the discount.
- Read the amount to pay early, the discount and the yearly rate that the discount is worth.
Formula
Discount = invoice x discount %
Days gained = days until due - days to take the discount
Simple yearly rate = discount / (1 - discount) x 365 / days gained
Compounded yearly rate = (1 + discount / (1 - discount))^(365 / days gained) - 1
Paying early means paying less money earlier, so the return is measured against the smaller amount you pay on the discount day.
Terms of 2/10 net 30 on $10,000
The terms mean 2% off if paid within 10 days, otherwise the full amount is due in 30 days. The discount is $200 and the early payment is $9,800, paid 20 days before the due date.
The $200 is earned on $9,800 over 20 days, so the simple yearly rate is 0.02 / 0.98 x 365 / 20, which is 37.24%. Compounded, it is 44.59%. If you borrow at 12% a year, taking the discount is worth more than the interest.
Why a small discount is a large rate
A discount of 2% for paying 20 days sooner is a short, cheap loan to your supplier. Because it is over a few days, the yearly equivalent is high. A business with spare cash, or a line of credit that costs less than this, comes out ahead by taking it.
The situation changes if paying early would leave you short of cash and force expensive borrowing. That is what the optional rate field is for.
For the seller offering terms
The same figure is the cost to you of offering the discount. A 2/10 net 30 term costs a seller the same 37.24% simple yearly rate for each customer that takes it, compared with waiting. Whether that is worth it depends on what the earlier cash lets you do.
If you would rather get paid sooner by selling the invoice, try the invoice factoring calculator. To work with other percentages, use the discount calculator or the APR calculator.
Assumptions and limits
- The discount applies to the full invoice and the full amount is due on the due date.
- The yearly rate uses 365 days.
- The rate you compare against is a number you enter.
- Late payment penalties, taxes and the risk of a cash shortfall are not modeled. This is not financial advice.
Frequently asked questions
What does 2/10 net 30 mean?
It means the buyer gets a 2% discount for paying within 10 days. Otherwise the full amount is due within 30 days.
How do I find the annual rate of an early payment discount?
Divide the discount by one minus the discount, then multiply by 365 divided by the days gained. For 2% and 20 days that is 37.24%.
Should I take an early payment discount?
Compare the yearly rate of the discount with what it costs you to borrow, or what you would earn on the cash. If the discount rate is higher and you can pay without a cash squeeze, taking it saves money.
Why are there two yearly rates?
The simple rate scales the return linearly over the year. The compounded rate assumes you could repeat the same gain every period, so it is larger. Use the simple one for a conservative comparison.