Standard trade-credit terms like “2/10 net 30” implicitly offer a very high annualized return for paying early — far higher than the discount percentage alone suggests.
How it works
The discount rate, divided by 100% minus that rate, times 365 divided by the gap between the discount and full-payment days, annualizes the implied cost of forgoing the discount — the standard way to judge whether taking it (even by borrowing to do so) is worthwhile.
What this does not include
This computes the implied rate of the terms themselves — it doesn’t factor in a business’s actual cost of capital or cash flow constraints, which determine whether taking the discount is practically achievable even when the math favors it.
How to use this calculator
- Enter the invoice amount, discount percentage, and the discount and full-payment day terms.
Frequently asked questions
Why is the implied annual rate so much higher than the discount percentage?
Because the discount applies to a short window (often just 20 days between the discount and net due dates) — annualizing that short-term benefit compounds it into a much larger effective rate.
Should a business borrow to take an early payment discount?
Often yes if the implied rate exceeds the business’s borrowing cost — a 37%+ implied rate, as in a typical “2/10 net 30” case, usually exceeds most available credit lines by a wide margin.
Do all suppliers offer early payment discounts?
No — offering a discount is a supplier’s own credit and cash-flow policy choice, not a universal or regulated trade practice, so terms vary supplier to supplier.
