Early Payment Discount APR Calculator (2/10 net 30)

Understanding the early payment discount calculator — concept and principle

Invoices often carry terms such as "2/10 net 30": take a 2% discount if you pay within 10 days, otherwise pay the full amount by day 30. Skipping the discount is the same as borrowing from your supplier for the extra 20 days, and this calculator shows what that borrowing costs as an annual interest rate. Buyers use it to decide whether to pay early; sellers use it to judge whether the discount they offer is too generous.

How it is calculated

• Annualised cost (simple) = d ÷ (100 − d) × 365 ÷ (net days − discount days) × 100
• Effective annual rate (compounded) = (1 + d ÷ (100 − d))^(365 ÷ (net days − discount days)) − 1

Here d is the discount in percent. The difference between net days and discount days is the extra credit period you gain by not taking the discount.

The principle

If an invoice is $100, paying on day 10 costs $98, while waiting until day 30 costs $100. By waiting you keep $98 for 20 more days and pay $2 for the privilege. The interest rate for that period is 2 ÷ 98, about 2.04%, not 2%, because the money you are effectively borrowing is the discounted amount. A year holds 365 ÷ 20 = 18.25 such periods. Multiplying gives the simple annual rate; compounding the period rate 18.25 times gives the effective annual rate, which assumes you could repeat the same trade all year.

Worked example

1. Inputs: discount 2%, discount period 10 days, net 30 days.
2. Period rate: 2 ÷ 98 = 0.020408.
3. Periods per year: 365 ÷ (30 − 10) = 18.25.
4. Simple annual cost: 0.020408 × 18.25 × 100 = 37.24%.
5. Effective annual rate: (1.020408^18.25 − 1) × 100 = 44.59%.

How to read the result

Compare the result with your cheapest source of short-term money, such as a credit line or the return on spare cash. If your bank charges 10% a year and skipping the discount costs 37%, borrowing from the bank to pay early saves money. If you would have to use expensive credit, or paying early would leave you short of cash for payroll, the decision may differ. Paying after the net date does not lower the true cost; it damages your supplier relationship and may bring late fees.

Common mistakes

• Dividing by 100 instead of (100 − d), which understates the cost.
• Dividing by the net days (30) instead of the extra days (20).
• Comparing the compounded rate with a quoted simple bank rate, or the other way round.

Frequently asked questions

What does 2/10 net 30 mean?

A 2% discount if paid within 10 days; otherwise the full amount is due within 30 days.

What is the cost of 1/10 net 30?

1 ÷ 99 × 365 ÷ 20 ≈ 18.4% simple annual cost.

Should a seller offer early payment discounts?

They speed up cash collection, but at these implied rates they are an expensive form of financing for the seller.

Sources: Brigham, E. F. & Ehrhardt, M. C., Financial Management: Theory and Practice, Cengage · Brealey, R. A., Myers, S. C. & Allen, F., Principles of Corporate Finance, McGraw-Hill